Accounts receivable turnover ratio

Definition

Accounts receivable turnover ratio measures how efficiently a company collects its receivables. It indicates the number of times average accounts receivable are collected during a specific period.

5 Must Know Facts For Your Next Test

1. It is calculated by dividing net credit sales by average accounts receivable.
2. A higher ratio suggests efficient collection processes and effective credit policies.
3. A lower ratio may indicate issues with customer creditworthiness or collection processes.
4. It can be used to compare against industry benchmarks to assess relative performance.
5. The ratio can impact the company's liquidity and cash flow management.

Review Questions

• How is the accounts receivable turnover ratio calculated?
• What does a high accounts receivable turnover ratio indicate?
• Why is it important to compare the accounts receivable turnover ratio with industry benchmarks?

Related terms

Net Credit Sales: Total sales made on credit minus returns and allowances.

Average Accounts Receivable: The sum of beginning and ending accounts receivable for a period divided by two.

Liquidity Ratio: A measure of a company's ability to meet short-term obligations using its most liquid assets.