Accounts Receivable Turnover Ratio Calculator- Formula & Examples

Receivable Turnover Calculator
Average Account Receivables
Receivable Turnover Ratio

 

The receivables turnover ratio calculator is a straightforward tool for determining the accounts receivable turnover ratio. The turnover ratio is a metric that demonstrates a company’s credit-granting efficiency as well as its ability to collect a debt.

This article will go over the definition of the receivables turnover ratio as well as how to calculate it using the accounts receivable turnover ratio formula. You’ll also discover what a high or low turnover ratio means, as well as the implications of each.

What is the turnover ratio of receivables?

Let’s go back a little bit and start at the beginning if you want to rapidly comprehend what the accounts receivables turnover ratio formula is, but don’t want to get overwhelmed by a brainful of accounting terms.

When you sell something, you usually get paid right away. Do you want to order that tasty pizza slice? Well, you’ll have to buy it right then and there, which means you’ll have to pay for it. Isn’t it simple enough? Sure, as long as you get paid or pay in cash, the act of buying or selling is followed by payment right away.

What happens, however, if you pay with a credit card? You still get your stuff, but the payment is deferred – that is, it is postponed.

Accounting follows a similar pattern. The revenue made when a company sells its goods or services on credit on a given day – the product is sold, but the money will be paid later – is known as net credit sales.

The cash flow (money movement) must be recorded in the accounting records to maintain track of it (bookkeeping is an integral part of healthy business activity). Accounts receivables are the legal claim that customers will pay for the product, and the receivables turnover ratio is a related measure that describes its efficiency.

Definition of the Receivables Turnover Ratio

The turnover ratio for accounts receivables is also known as the receivables turnover ratio or simply the turnover ratio. What is, however, the receivables turnover ratio?

It’s an activity ratio that measures how efficient a firm is at providing credit to its customers (measured in net credit sales) and recovering money owing to the company (measured in average accounts receivables). The daily turnover ratio of receivables is calculated.

A high turnover ratio is beneficial to a business since it indicates that the time between credit sales and payment is not excessive. The company receives prompt payment of outstanding debts, maintains liquidity, and is able to continue operating – that is, making new credit sales. The faster the company is paid, the higher the turnover ratio.

A low turnover ratio, on the other hand, is not encouraged because it suggests a long interval between credit sales and payment. It puts the company at risk of not being able to continue operating due to a lack of finances.

What is the formula for the accounts receivable turnover ratio?

Now that you’ve learned what the receivables turnover ratio is, you’re undoubtedly curious about how to calculate the accounts receivables turnover ratio. Don’t worry; answering the question “what is the accounts receivable turnover ratio formula?” isn’t as complex as it appears. It consists of the following components:

Receivables turnover ratio = net credit sales / average accounts receivables,

where:

The receivables turnover ratio measures how well a company extends credit to its clients and how quickly it receives payment on a given day.

Revenue from goods or services sold on credit on a certain day and to be paid at a later date, known as net credit sales.

Average accounts receivables – the claim to money owed to the company from prior credit sales that it has yet to receive from consumers. This variable can be broken down and calculated further:

Average accounts receivables = (accounts opening + accounts closing) / 2,

where:

The quantity of outstanding receivables at the start of the day is referred to as the accounts opening or accounts receivables (opening).

The quantity of outstanding receivables at the end of the day is referred to as accounts closure or accounts receivables (close).

The next part will provide an example to show you how to calculate the receivables turnover ratio now that you know the secret to the accounts receivable turnover ratio formula calculator.

What is the formula for calculating the accounts receivable turnover ratio? – a calculator for the receivables turnover ratio

Let’s pretend you’re the CEO of “Calculator Enterprises Incorporated,” and you’d like to figure out your turnover ratio. Your net credit sales are $15,000, including a $2000 account opening fee and a $3000 account closing fee. To calculate your turnover ratio, you must first calculate the average accounts receivables. To do so, double the opening and closing account balances by two:

Average accounts receivables = ($2000 + $3000) / 2 = $2500.

Then split the following credit sale by your result:

Receivables turnover ratio = $15000 / $2500 = 6.

Your turnover ratio is equal to 6 in this scenario.

Those computations are simple to understand. Still, if you’re doing them for a long period of time, we recommend using our receivables turnover ratio calculator to save time and brainpower.

You’ve now learned how to compute the accounts receivable turnover ratio.