Accounts Receivable Turnover Ratio

Accounts receivable turnover ratio, abbreviated as AR, is a financial metric used to evaluate how efficiently a company manages its credit sales and collects payments from its customers.  It measures the number of times, on average, that a company collects its accounts receivable balance during a specific period, typically a year.

A higher accounts receivable turnover ratio generally indicates that a company is effectively managing its accounts receivable and collecting payments from customers in a timely manner.  Conversely, a lower ratio may suggest that a company is struggling to collect payments efficiently or that it has a high level of credit risk associated with its customers.

It's important to consider industry benchmarks and trends over time when analyzing the accounts receivable turnover ratio, as optimal ratios can vary widely across different industries and business models.  Additionally, changes in the accounts receivable turnover ratio should be examined in conjunction with other financial metrics and operational factors to gain a comprehensive understanding of a company's financial health and performance.

 

accounts receivable turnover ratio Formula

\( AR =  NCS \;/\; AAR \)

Symbol

\( AR \) = accounts receivable turnover ratio

\( NCS \) = net credit sales

\( AAR \) = average accounts receivable