Accounts receivable turnover is a financial ratio that measures how efficiently a business collects payments from its customers. Specifically, it shows how many times a company converts its average accounts receivable into cash over a given period, typically a year.
The formula is:
- Net Credit Sales ÷ Average Accounts Receivable.
A higher turnover ratio indicates that customers are paying their debts quickly, which is generally a sign of strong cash flow and effective credit management. A lower ratio may suggest issues with collecting payments or overly lenient credit policies.
Monitoring this ratio helps businesses evaluate their credit policies and cash collection efficiency.