Accounts Receivable Turnover Ratio: Calculate, Interpret & Improve

Navigating the world of business finance can sometimes feel like a daunting task, especially when it comes to managing your accounts receivable. Understanding and optimizing your accounts receivable turnover ratio is crucial for maintaining healthy cash flow and ensuring your company’s financial stability. In this blog, we'll break down everything you need to know about this key financial metric and how it can benefit your business.

Continue reading to discover:

• What is the Accounts Receivable Turnover Ratio?

• How to Calculate Your Accounts Receivable Turnover?

• What’s a Good Accounts Receivable Turnover Ratio?

• How to Improve Your Accounts Receivable Turnover?

You can also download our free spreadsheet from the banner below to calculate your AR turnover ratio and other important AR metrics.

What is the Accounts Receivable Turnover Ratio?

The accounts receivable turnover ratio, also known as "receivable turnover" or "debtors turnover," measures how efficiently your company collects payments from customers who purchase on credit. Essentially, it indicates the average number of times your receivables are converted to cash during a specific period.

Tracking this metric is crucial as it provides insight into the effectiveness of your accounts receivable and collections processes. A high turnover ratio suggests that your company collects its receivables quickly, contributing to better cash flow and liquidity. Conversely, a low turnover ratio may indicate inefficiencies in your collections process, which can impact your cash flow and financial health.

By monitoring your accounts receivable turnover ratio, you can identify areas for improvement in your collections process and enhance your overall financial management. Additionally, this metric can aid in revenue forecasting by providing a clearer picture of the time it takes to convert earned revenue into actual cash.

How to Calculate Your Accounts Receivable Turnover 

You calculate the ratio annually by dividing net credit sales by average accounts receivables for a set period. For example, the formula for one year will be:

Here, net credit sales is nothing but the total sales made on credit during a specific period, excluding any returns or allowances.

Accounts Receivable Turnover Example

For example, if your net credit sales for the year is $100,000, and your average accounts receivable for the year is $10,000 (start of year: $8,000 and end of year: $12,000), then your AR turnover ratio is 10/1 or 10. This would mean you collect your receivables 10 times every year

Accounts Receivable Turnover vs. Average Collection Period

While the accounts receivable turnover ratio measures how often you collect your receivables within a specific period, the average collection period translates AR turnover ratio into the average number of days it takes to collect payments. Essentially, while the turnover ratio provides a frequency, the average collection period gives a time frame, offering a more tangible view of your collection efficiency. Thus, the Average Collection Period formula =

In this example above, your Average Collection Period is: 365/10 = 36.5 days

Accounts Receivable Turnover vs. DSO

Note that AR turnover isn’t quite the same as DSO (days sales outstanding).

DSO is simply a measurement of the number of days on average it takes you to get paid after issuing an invoice.

The simplest way to calculate DSO is:

(Accounts receivable at the end of the period / Gross revenue for the period) x Days in the period

For example, if your A/R at the end of a year is $12,000, and your gross revenue for the year is $100,000, DSO looks like this: 

(12,000/100,000) x 365 = 43.8, thus your DSO is 43.8 days

What’s a Good Accounts Receivable Turnover Ratio?

There’s no perfect answer for what’s a good versus bad receivables turnover ratio. 

A desirable AR turnover ratio is generally high. That indicates a short collection period and that you have an efficient and effective collection process.

A lower ratio could indicate that your company is liberal with extending credit and/or inefficient at collections. Generally, the higher ratio indicates a more fiscally stable and responsible company, but you may decide a lower ratio is OK to capture sales ahead of competitors or keep customers in tough economic conditions.

What makes a good ratio varies widely by industry, as well. To give you a benchmark, here are recorded ratios by industry sector as of Q1 2024, reported by CSIMarket.com:

Within your own company, think less about “what is a good or bad number,” and focus more on the trend. If your ratio dips suddenly or consistently drops each month or year, take a look at your collections processes to find opportunities to improve efficiency.

How to Improve Your Accounts Receivable Turnover

To improve your accounts receivable turnover ratio, you simply have to shrink the amount of time it takes you to get paid.

Some ways to improve your accounts receivable collections include:

• Use a consistent invoicing system. Make sure customers know when to expect to be billed and how they’ll receive their invoice. This helps them plan for their cash flow and pay on time. 

• Create clear invoices. If customers can’t interpret their invoices, they’ll have a harder time paying what they owe on time. Make sure your invoices are clear, so they know what they’re looking at and can easily confirm the services you’re charging for.

• Simplify reminders. Spare customers a slew of reminders for every outstanding invoice, and create a system that sends reminders at the account level. That lets a customer see their full outstanding balance all in one place and easily pay at once.

• Offer flexible payment options. Make it easy for customers to pay on time by being flexible with your terms to meet their needs. Also offer multiple ways to receive payment, and make it easy to pay online as soon as they receive the invoice by using an electronic invoicing and payment system.

• Offer early-payment discounts. Incentivize customers to pay invoices before they’re due by offering a discount. This encourages more customers to pay on time, and early payments can offset late payers and improve your A/R turnover.

• Be proactive about collections. Hire a dedicated person or team to handle accounts receivable and stay on top of communications regarding billing and collections, so this process doesn’t fall by the wayside.

• Use a dashboard for better visibility. A dashboard that automatically tracks and reports your accounts receivable metrics can help you easily see how your A/R turnover is trending. At Upflow, we offer solutions that let you see a real-time view of your accounts receivable metrics to improve your collections' efficiency and make more accurate financial projections.