Accounts Receivable Turnover Ratio Calculator

Net Credit Sales (NCS):



Average Accounts Receivable (AR):



Calculate

Accounts Receivable Turnover Ratio:

The Accounts Receivable Turnover Ratio Calculator is a useful tool for determining how efficiently a company collects its credit sales. The turnover ratio is a financial metric that measures how often accounts receivable are collected over a given period. A high ratio indicates efficient collection, while a low ratio suggests potential issues in collecting receivables.

Formula

The formula for calculating the accounts receivable turnover ratio is:

ART Ratio = Net Credit Sales (NCS) / Average Accounts Receivable (AR)

Where:

• NCS refers to the total credit sales made by a company.
• AR refers to the average accounts receivable over a period, typically a year.

How to Use

1. Enter Net Credit Sales (NCS): Input the total credit sales for a specific period.
2. Enter Average Accounts Receivable (AR): Input the average value of receivables for the same period.
3. Click “Calculate”: The turnover ratio will be displayed immediately, showing how efficiently the company collects payments on its receivables.

Example

If a company has $500,000 in net credit sales and the average accounts receivable is $50,000, the accounts receivable turnover ratio will be 10. This means the company collects its receivables 10 times a year.

FAQs

1. What is the accounts receivable turnover ratio?
   The accounts receivable turnover ratio measures how efficiently a company collects on its credit sales.
2. What is a good accounts receivable turnover ratio?
   A higher ratio is better, as it indicates the company is efficient in collecting receivables. However, the ideal ratio varies by industry.
3. How is net credit sales calculated?
   Net credit sales are calculated by subtracting sales returns and allowances from total credit sales.
4. What does a low accounts receivable turnover ratio indicate?
   A low ratio suggests inefficiency in collecting receivables, possibly due to poor credit policies or customers delaying payments.
5. How often should I calculate the turnover ratio?
   It is commonly calculated on an annual, quarterly, or monthly basis, depending on the needs of the business.
6. Why is the accounts receivable turnover ratio important?
   It is an important indicator of a company’s liquidity and cash flow, helping assess the risk of bad debts.
7. Can a high turnover ratio be bad?
   A very high ratio might indicate that a company is too strict with its credit policies, possibly turning away potential customers.
8. How can I improve my accounts receivable turnover ratio?
   Improve it by tightening credit policies, following up on overdue payments, or offering early payment incentives to customers.
9. What is the average accounts receivable?
   It is the sum of the beginning and ending balances of accounts receivable, divided by two.
10. Does the accounts receivable turnover ratio vary by industry?
    Yes, industries with shorter payment terms may have higher ratios, while industries offering longer credit terms may have lower ratios.
11. How do I find average accounts receivable?
    To find the average, add the beginning and ending accounts receivable balances for the period and divide by two.
12. What affects accounts receivable turnover?
    Factors like credit policies, customer payment behavior, and the overall economy can affect this ratio.
13. How does the ratio relate to cash flow?
    A higher turnover ratio often leads to better cash flow, as it means quicker collection of receivables.
14. Can I use this ratio to compare companies?
    Yes, comparing the ratio across companies in the same industry helps determine which company collects receivables more efficiently.
15. What is the difference between gross and net credit sales?
    Gross credit sales are total sales made on credit, while net credit sales subtract returns and allowances.
16. How do credit terms affect the turnover ratio?
    Offering longer credit terms may reduce the turnover ratio, as customers take more time to pay.
17. What happens if my accounts receivable turnover ratio is too low?
    A low ratio can lead to cash flow problems and may indicate potential bad debts or inefficient collection policies.
18. Is this ratio important for small businesses?
    Yes, it is crucial for small businesses to monitor, as cash flow is often more critical for smaller operations.
19. Can external factors impact my turnover ratio?
    Yes, economic conditions, market trends, and customer financial health can all affect your accounts receivable turnover ratio.
20. What role does customer relationship management play?
    Maintaining good relationships with customers can improve timely payments, thus increasing the turnover ratio.

Conclusion

The Accounts Receivable Turnover Ratio Calculator is an essential tool for businesses to gauge the efficiency of their receivables collection processes. By regularly calculating and monitoring this ratio, companies can improve cash flow and make informed decisions on credit policies.