Accounts Receivable Turnover Calculator

What is the accounts receivable turnover ratio?

Accounts receivable turnover is the number of times a business collects its average receivables balance during a period: net credit sales divided by accounts receivable. A turnover of 8.00 means a year’s credit sales were eight times the receivables on the balance sheet, so the balance was collected about every 45.6 days. Higher turnover means faster collection.

It is an activity ratio: it compares a flow from the income statement (credit sales) with a balance from the balance sheet (receivables). That is why the period of the sales and the date of the balance must match.

How do you calculate accounts receivable turnover?

Divide net credit sales by accounts receivable. With $1,200,000 of credit sales and $150,000 of receivables at year-end, turnover is $1,200,000 ÷ $150,000 = 8.00 times: the calculator’s defaults. Net credit sales are credit sales after returns and allowances; cash and card sales are left out because they never become receivables.

Many textbooks divide by average receivables: (opening + closing) ÷ 2. With $120,000 at the start of the year and $180,000 at the end, the average is $150,000 and turnover is again 8.00. The average is better when the year-end balance is unusually high or low; the calculator offers both and names the one used.

How do you convert receivable turnover to days?

Divide the days in the period by the turnover: 365 ÷ 8.00 = 45.6 days. That is the average collection period, the same figure as days sales outstanding. On a 360-day year it is 45.0 days; the turnover itself does not change.

Your payment terms give a turnover to compare with. Net 45 implies 365 ÷ 45 = 8.11 times a year. A turnover of 8.00 is slightly below that, which means customers take about 0.6 days longer than terms on average. A turnover of 8.50 would mean a 42.9-day collection period, about 2.1 days faster than terms; 7.00 would mean 52.1 days, 7.1 days slower.

How do you read a receivables turnover trend?

One year’s ratio says little on its own. The default trend shows three years: 6.29 (Prior period 2: $1,100,000 ÷ $175,000), 6.97 (Prior period 1: $1,150,000 ÷ $165,000) and 8.00 now, collection periods of 58.1, 52.4 and 45.6 days. Collections are getting faster even though the latest year is still just short of what Net 45 implies.

A rising ratio is not always good news: very tight credit terms can raise turnover while losing customers, and a fall in credit sales lowers turnover without anyone paying later. Read the ratio with your terms, your sales and your own history. Industry averages are not shown, because they are published without the terms behind them.

How does receivables turnover fit into the cash conversion cycle?

The collection period is the DSO in the cash conversion cycle: days inventory outstanding + days sales outstanding − days payable outstanding. Faster collection shortens the cycle and the cash the business needs to fund it, so a rise in receivables turnover shows up directly as fewer days of working capital tied up.

The cash conversion cycle calculator on this site uses the same formula and the same balance conventions, and the days sales outstanding calculator shares this engine with DSO as its headline.

This is an estimate from the figures you enter. It is not accounting or credit advice, and it does not recommend terms or a credit policy.