Accounts Receivable Turnover Ratio (Complete Guide)

July 15, 2022

Accounts Receivable Turnover Ratio (Complete Guide)

The accounts receivable turnover ratio is one of the fundamental concepts underlying the analysis of working capital. It is a predictor of future cash flows and a measure of a company's efficiency in managing its accounts receivables.

This article will explain this concept in more detail and answer some key questions, such as What is a good accounts receivable turnover ratio? How to find receivables turnover ratio? How to calculate accounts receivable turnover ratio? and much more

What is a good ratio for accounts receivable turnover?

There is no correct answer to this question because there are so many variables involved. So, the right answer for one business could be completely wrong for another company working in a different sector or industry.

However, generally speaking if your accounts receivable turnover ratio is greater than 120% then you probably have too much cash tied up in accounts receivables and could be losing money.

Accounts receivable turnover ratio formula 

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

What does the receivable turnover ratio tell us?

The receivable turnover ratio (shortened to ROT) is a short-term liquidity measure used by (mainly) medium and large corporate businesses. The ROT ratio helps us understand how quickly a business is selling its receivables (also known as trade payables).

Receivable turnover ratio can also tell us a lot about a company's financial health and its ability to get paid. For example, it can tell us:

1. How fast the company turns over their receivables (their money owed)

2. How much money they're actually getting back from their debtors

3. If their debtors have been paying them back on time, or if there are any issues with cash flow

Is a high accounts receivable turnover ratio good?

Yes, a high accounts receivable turnover ratio is good. In short, the accounts receivable turnover ratio is the number of times your company has collected on its outstanding invoices over a given period. It's expressed as a percentage and represents how often you're collecting on your invoices. A higher number means you're collecting more often than you have been historically.

The higher this number is, the better it is for your business. If you compare two businesses that are identical in every respect except their accounts receivable turnover ratios, the business with the higher ratio would be able to turn over its inventory (or pay bills) more quickly than the one with lower ratio. This means they can make more money!

Is a low accounts receivable turnover ratio good?

No, a low accounts receivable turnover ratio is not good. If your accounts receivable turnover ratio is low, then it means that customers are paying their bills slowly or not at all. This can be problematic because it slows down the flow of cash from sales and can cause cash flow problems with vendors and suppliers.

Conclusion

Accounts receivable turnover ratio is an effective way to compare your company's cash flow from month to month. The higher the ratio, the more money you can expect to have available for operational purposes. Now that you know how it works, you are better prepared to understand its potential shortcomings, too.

Whether Accounts Receivable Turnover Ratio will be useful to you depends on your company's situation and business model. But if you want a tool that you can definitely benefit from every month, consider LiveFlow. One of the best financial accounting tools on the market, LiveFlow empowers companies to manage their accounts, and make the most of their financial data.

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