Business, Legal & Accounting Glossary
Accounts Receivable Turnover is a ratio that indicates the number of times average receivables are turned over during a year. A popular variation of the Accounts Receivable Turnover Ratio is called Days Sales Outstanding. It is determined by converting the ratio into an average collection period in terms of days.
Accounts Receivable Turnover is calculated by dividing the company’s annual revenue by its average accounts receivable balance during the same year. Accounts receivables are sales made to customers on credit with terms for customers to pay the balance due.
Accounts receivable turnover determines how quickly a company collects outstanding cash balances from its customers. It is an important indicator of whether a company is having difficulties collecting sales made on credit.
The usefulness of this ratio strongly depends on the industry and other factors. The higher the value of receivables turnover the better the company is in terms of collecting their accounts receivables. It signifies that the debtors are liquid, and/or management of debtors is efficient.
A low accounts receivable ratio implies inefficient management of debtors or less liquid debtors. In some cases, too high of a ratio can indicate that the company’s credit lending policies are too stringent, preventing prime borrowing candidates from becoming customers.
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This glossary post was last updated: 23rd March, 2020 | 2 Views.