Accounts Receivable Turnover
Quick Definition
A financial ratio measuring how efficiently a company collects payments from customers, calculated by dividing net credit sales by average accounts receivable.
Key Takeaways
- AR Turnover = Net Credit Sales ÷ Average Accounts Receivable
- Higher turnover means faster collection; lower turnover means slower collection
- Must be compared within the same industry — norms vary dramatically by sector
- Declining turnover can signal deteriorating customer quality or aggressive revenue recognition
What Is Accounts Receivable Turnover?
Accounts Receivable Turnover is an efficiency ratio that measures how many times per year a company collects its average accounts receivable balance. The formula is: AR Turnover = Net Credit Sales ÷ Average Accounts Receivable. A higher turnover ratio indicates more efficient collection — the company is converting credit sales into cash more quickly. Conversely, a lower ratio suggests the company is struggling to collect payments or is extending overly generous credit terms. The inverse of this ratio, converted to days (365 ÷ AR Turnover), gives the Days Sales Outstanding (DSO), which represents the average number of days it takes to collect payment after a sale. Industry comparison is essential, as different sectors have vastly different norms — a grocery chain might have AR turnover of 50× (collecting in ~7 days) while a construction company might have turnover of 4× (collecting in ~90 days). Declining AR turnover over time warrants investigation — it could indicate deteriorating customer credit quality, a shift toward larger enterprise customers with longer payment terms, or channel stuffing to inflate revenue.
Accounts Receivable Turnover Example
- 1Company A has $10M in net credit sales and average AR of $2M, giving an AR turnover of 5× — meaning it collects its receivables roughly every 73 days.
- 2If AR turnover drops from 8× to 5× year-over-year while revenue grows 10%, the company may be sacrificing collection speed to drive top-line growth.
Related Terms
Accounts Receivable (AR)
Money owed to a company by its customers for goods or services delivered on credit, recorded as a current asset on the balance sheet.
Days Sales Outstanding (DSO)
The average number of days it takes a company to collect payment after a sale, measuring accounts receivable efficiency.
Inventory Turnover
A ratio measuring how many times a company sells and replaces its inventory during a period, indicating operational efficiency.
Asset Turnover Ratio
An efficiency ratio measuring how effectively a company uses its total assets to generate revenue, calculated as revenue divided by average total assets.
Cash Conversion Cycle (CCC)
The number of days it takes a company to convert its investments in inventory and other resources into cash from sales.
Revenue
The total amount of money a company earns from its business activities before any expenses are deducted, also called sales or top line.
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