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Accounts Receivable Turnover Ratio and How To Calculate It

6 March 2023

The accounts receivable turnover ratio (ARTR) is a critical metric for monitoring accounts receivable and a company’s financial stability.

But what does ARTR mean, and how can you calculate it?

This guide will walk you through the basics of ARTR and, more importantly, how to use it to improve your cash flow, keep track of your balance sheet, and increase profits.

We cover:

  • What Is the Accounts Receivable Turnover Ratio?
  • Why You Need To Calculate the Accounts Receivable Turnover Ratio?
  • What Is a Good Accounts Receivable Turnover Ratio?
  • What Is the Accounts Receivable Turnover Ratio Formula?
  • What Is the Average Collection Period Formula?
  • How To Improve Your Accounts Receivable Turnover Ratio?
  • Final Thoughts: Accounts Receivable Turnover Ratio and How To Calculate It

What Is the Accounts Receivable Turnover Ratio?

The accounts receivable turnover ratio (ARTR) is a financial ratio that measures the number of times accounts receivable are collected or “turned over” within a given period of time.

In other words, ARTR is used to measure the rate at which a company collects payments from customers.

By calculating ARTR, you can:

  • Reveal how well or poorly your business is managing its accounts receivable — that is, how quickly it’s able to convert unpaid invoices into cash according to terms of sale.
  • Get critical insight into customer payment habits, cash flow issues, and credit management practices of both suppliers and customers.
  • Keep track of your business’s liquidity and ability to pay its own bills.

Why You Need To Calculate the Accounts Receivable Turnover Ratio

By calculating the ARTR, businesses can gain valuable insights into their credit management practices. It can also be used to benchmark against similar industries and competitors, which can help identify areas of improvement.

By regularly tracking your ARTR, you can:

  • Identify potential cash flow issues
  • Address credit management problems quickly
  • Reveal how long it’s taking customers to pay invoices
  • Evaluate customer satisfaction levels (customers who are unhappy with what they receive may not be as likely to make timely payments regardless of collection policies)
  • Gain a deeper understanding of your business’s overall financial performance

Tracking your ARTR empowers you to make more informed decisions about how to best manage your cash flow and increase profit margins. It puts you in a position to identify potential problems that may threaten the financial health of your business.

For example, if a company’s ARTR is significantly lower than the industry average, it could be an indication that customers aren’t paying their invoices on time or that the company isn’t billing them in a timely manner.

By calculating and analyzing this ratio, businesses can take proactive steps to improve customer payment habits, adjust collection policies, and manage their own accounts receivable more efficiently.

What Is a Good Accounts Receivable Turnover Ratio?

ARTR targets vary by industry, but generally, a higher ratio indicates more efficient management of accounts receivable.

The higher your ARTR, the quicker your business is able to collect money from customers.

Lower ratios suggest you’re collecting payments late or having cash flow issues.

To determine how quickly your company should collect payments from customers, set your ARTR goals based on past performance and industry standards

Based on the Q4 2022 receivable turnover screening conducted by CSI Market, retail companies have an ARTR as high as 15 due to their short payment terms and frequent transactions. On the other hand, technology companies have a lower ARTR of six or less due to longer payment terms.

You also need to take into account any changes in the market or business climate that might affect your cash flow. For example, if you’re expanding and have to hire new employees, you may need to adjust your ARTR to keep up with operating costs.

What Is the Accounts Receivable Turnover Ratio Formula?

To calculate ARTR, divide your net credit sales within an accounting period by the average accounts receivable balance during that same period.

The accounts receivable turnover formula is:

Let’s say your company has total credit sales of $100,000 and an average accounts receivable balance of $20,000 during a given period. This would result in an ARTR of five.

This indicates the company is converting its receivables into cash five times during the set amount of time.

What Is the Average Collection Period Formula?

While ARTR measures how many times a company’s accounts receivable are “turned over” for a set period, your company’s average collection period (ACP) ratio is the average number of days it takes for a company to collect money from its customers.

If we’re analyzing your company’s financial statements for a full year, your average collection period formula is:

As an example, if a company has an ARTR of 25, then the ACP would be 15 days.

This means if a company’s ARTR shows it collects its account receivables 25 times per year, then the company’s average collection period for accounts receivable is 15 days to collect money from its customers.

A lower average collection period means a company is collecting money faster, which could mean a higher ARTR.

Both are good indicators of a company’s ability to collect its receivables quickly and efficiently.

How To Improve Your Accounts Receivable Turnover Ratio

To improve your ARTR, you need to have effective cash management, strong collection policies, and credit control procedures in place.

These tips can help improve your ARTR:

Final Thoughts: Accounts Receivable Turnover Ratio and How To Calculate It

The accounts receivable turnover ratio (ARTR) and the average collection period (ACP) are two important metrics that can help you understand how quickly your organization is collecting on its invoices.

You can manage your cash flow more effectively by learning how to track both. Add to the mix some effective strategies for managing your accounts receivable, and you’ll be on the right track to improving the health of your business.

If you need help improving your accounts receivable process, contact k-ecommerce today to get started. We’ll help you find the right solutions for your business.