Accounts Receivable Turnover

How effective is your business at collecting trade debt?

Sales to customers where you've offered credit terms need collecting. Accounts receivable turnover is one of a few useful accounting formulas that can show you how well you are doing.

To collect debt effectively, you need robust credit control and collections processes in place.

Debtor days (which is a derivation from this formula), and debt ageing analysis are other tools to help you manage how well you collect your trade debts.

Accounts Receivable Formula

Accounts Receivable Turnover=Credit Sales/Accounts Receivable

So for example if my non-cash sales are $97,500 for the year, and my accounts due and receivable are $15,800 then my turnover ratio is

$97,500 / $15,800 = 6.17 times

To convert this into account receivables days (debtor days) then take the number of days in the reported year - in this case 365 - and divide by the computed turnover ratio

365 / 6.17 times = 59 days

So, in this worked example, I collect in my debts every 59 days or 6.17 times a year

The first time you do this for your own business, it may come as a bit of a shock. It's usually higher than you expect.

If you start to measure this on a rolling 12 month basis, then you can begin to understand seasonal variations, and any progress in your efficiency at collecting debts out.

If you really want to make a difference to the working capital of your business (by using this accounting ratio), you must implement effective working capital management processes and suitable preventative controls.

Aged debt analysis will help you take remedial action to control those customers who are slipping, taking advantage, or paying late, but you could not identify this information from the receivables turnover ratio alone.

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