Therefore, when using this ratio, an investor should consider the business model and industry of a company for the metric to have any real comparative value. The net credit sales can usually be found on the company’s income statement for the year although not all companies report cash and credit sales separately. Average receivables is calculated by adding the beginning and ending receivables for the year which of the following represents the receivables turnover ratio? and dividing by two. In a sense, this is a rough calculation of the average receivables for the year. Given the accounts receivable turnover ratio of 4.8x, the takeaway is that your company is collecting its receivables approximately five times per year. If the accounts receivable turnover is low, then the company’s collection processes likely need adjustments in order to fix delayed payment issues.

That’s where an efficiency ratio like the accounts receivable turnover ratio comes in. Congratulations, you now know how to calculate the accounts receivable turnover ratio. To find their accounts receivable turnover ratio, Centerfield divided its net credit sales ($250,000) by its average accounts receivable ($50,000).

Receivables Turnover Ratio Calculator

Another example is to compare a single company’s accounts receivable turnover ratio over time. A company may track its accounts receivable turnover ratio every 30 days or at the end of each quarter. In this manner, a company can better understand how its collection plan is faring and whether it is improving in its collections.

Accounts receivable turnover also is and indication of the quality of credit sales and receivables. A company with a higher ratio shows that credit sales are more likely to be collected than a company with a lower ratio. Since accounts receivable are often posted as collateral for loans, quality of receivables is important. Another limitation is that accounts receivable varies dramatically throughout the year. These entities likely have periods with high receivables along with a low turnover ratio and periods when the receivables are fewer and can be more easily managed and collected.

Receivable Turnover Ratio

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 low asset turnover ratio indicates that the company is using its assets inefficiently to generate sales. We start by replacing the company’s “first period” of receivables with the January 1 data and “last period” with the information for December 31. Then we add them together and divide by two, giving us $35,000 as the average accounts receivable. A low ratio may also indicate that your business has subpar collection processes. On the other hand, it could also be that your collection staff members are not receiving the training they need or are not assertive enough when following up on unpaid invoices.