what is the accounts receivables turnover ratio 
the accounts receivables turnover ratio measures the number of times a company collects its average accounts receivable balance it is a quantification of a company s effectiveness in collecting outstanding balances from clients and managing its line of credit process an efficient company has a higher accounts receivable turnover ratio while an inefficient company has a lower ratio this metric is commonly used to compare companies within the same industry to gauge whether they are on par with their competitors investopedia zoe hansenunderstanding receivables turnover ratiosaccounts receivable are effectively interest free loans that are short term in nature and are extended by companies to their customers if a company generates a sale to a client it could extend terms of 30 or 60 days meaning the client has 30 to 60 days to pay for the product the receivables turnover ratio measures the efficiency with which a company is able to collect on its receivables or the credit it extends to customers the ratio also measures how many times a company s receivables are converted to cash in a certain period of time the receivables turnover ratio is calculated on an annual quarterly or monthly basis accounts receivables appear under the current assets section of a company s balance sheet formula and calculation of the receivables turnover ratiothe accounts receivable turnover ratio is the relationship between net credit sales and average accounts receivable 1wallstreetmojothe numerator of the accounts receivable turnover ratio is net credit sales the amount of revenue earned by a company paid via credit this figure does not include cash sales as cash sales do not incur accounts receivable activity net credit sales also incorporates sales discounts or returns from customers and is calculated as gross credit sales less these residual reductions it is important that the calculation uses a consistent timeframe therefore the net credit sales should only incorporate a specific period i e net credit sales for the second quarter only should returns happen in a future period this figure should be included in the calculation as it relates to the activity being analyzed the denominator of the accounts receivable turnover ratio is the average accounts receivable balance this is usually calculated as the average between a company s starting accounts receivable balance and ending accounts receivable balance companies with more complex accounting information systems may be able to easily extract its average accounts receivable balance at the end of each day the company may then take the average of these balances however it must be mindful of how day to day entries may change the average similar to calculating net credit sales the average accounts receivable balance should only cover a very specific time period high vs low receivables turnover ratioa high receivables turnover ratio can indicate that a company s collection of accounts receivable is efficient and that it has a high proportion of quality customers who pay their debts quickly a high receivables turnover ratio might also indicate that a company operates on a cash basis a high ratio can also suggest that a company is conservative when it comes to extending credit to its customers conservative credit policies can be beneficial since they may help companies avoid extending credit to customers who may not be able to pay on time on the other hand having too conservative a credit policy may drive away potential customers these customers may then do business with competitors who can offer and extend them the credit they need if a company loses clients or suffers slow growth it may be better off loosening its credit policy to improve sales even though it might lead to a lower accounts receivable turnover ratio a low receivables turnover ratio isn t a good thing that s because it may be due to an inadequate collection process bad credit policies or customers that are not financially viable or creditworthy a low turnover ratio typically implies that the company should reassess its credit policies to ensure the timely collection of its receivables however if a company with a low ratio improves its collection process it might lead to an influx of cash from collecting on old credit or receivables in some cases though low ratios aren t always bad for example if the company s distribution division is operating poorly it might be failing to deliver the correct goods to customers in a timely manner as a result customers might delay paying their receivables which would decrease the company s receivables turnover ratio the asset turnover ratio is another important metric it measures the value of a company s sales or revenues relative to the value of its assets and indicates how efficiently a company uses its assets to generate revenue a higher ratio means the company is more efficient a low asset turnover ratio indicates that the company is using its assets inefficiently to generate sales importance of receivables turnover ratiothe accounts receivable turnover ratio communicates a variety of useful information to a company the ratio tells a company usefulness of the accounts receivables turnover ratiolike other financial ratios the accounts receivable turnover ratio is most useful when compared across time periods or different companies for example a company may compare the receivables turnover ratios of companies that operate within the same industry in this example a company can better understand whether the processing of its credit sales are in line with competitors or whether they are lagging behind its competition 