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FAQ

How to Calculate AR Turnover?

Calculate AR Turnover by dividing net credit sales by average account receivables. 

The formula for how to calculate the AR turnover ratio is:

  • Accounts Receivable Turnover = Net credit sales for the period / Average Accounts Receivable
    • Net Credit sales = credit sales – goods returned – sales allowances
    • Average accounts receivable = (Opening AR balance + Closing AR balance) / 2

What is a good AR Turnover Ratio?

Figuring out what a good AR turnover ratio is dependent on your company goals. A good starting point is researching the average accounts receivable (AR) turnover ratio by industry. Instead of trying to meet a high or low mark, compare your ratio to your industry’s average accounts receivable turnover ratio.

Your AR turnover ratio should align with company goals, whether it’s to increase working capital or extend longer credit terms to customers.

Why is it Important to Track AR Turnover?

It’s important to track AR turnover because it is a sign of your organization’s financial health.  Here’s why organizations track AR turnover:

  • Measures liquidity – Indicator of cash flow health.
  • Insights for investors – Gives investors data on the financial stability of your business.
  • Performance indication – Helps you understand the effectiveness of your credit processes and policies and strategize how to achieve better AR processes.

What are some Reasons why People Turn Over in AR Departments?

On the human resources front, departmental turnover — when individuals leave their position in an A/R department — often occurs because of repetitive work without technology to support them.

  • Routine work: AR departments stuck with manual processing get bored with the repetitive work, which includes sending invoices, in addition to recording and reconciling payments.
  • Pressure – Accounts receivables processes have a direct impact on cash flow, and there may not be much room for error.
  • Lack of automated technology – Without AR automation, the accounts receivable process is slow and it’s difficult to achieve a good accounts receivable turnover ratio.

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