How to calculate receivables turnover
Accounts receivable turnover = net credit sales / average accounts receivable.
- Take net credit sales for the period: sales on terms, less returns and allowances.
- Work out average receivables: the opening balance plus the closing balance, divided by two.
- Divide the first by the second. The answer is how many times you collected your average balance in the period.
- To turn it into days, divide the days in the period by the ratio.
A worked example
With the figures already in the calculator: $420,000 of credit sales in a year, $52,000 owed at the start and $44,000 at the end.
- Average receivables: (52,000 + 44,000) / 2 = $48,000.
- Turnover: 420,000 / 48,000 = 8.75 times.
- Days to collect: 365 / 8.75 = 41.7 days.
Turnover and days to collect are the same fact told two ways. The days figure is the same number the DSO calculator gives from the same inputs.
What is a good accounts receivable turnover ratio
It depends on your terms, so convert your terms into the ratio you would get if everyone paid on time. Over a year, net 30 works out to about 365 / 30 = 12.2 times, and net 60 to about 6.1 times. A ratio well below that line means customers are paying later than you ask.
Use the ratio when comparing periods or businesses, because it does not care whether you are looking at a month or a year. Use days when you are talking to somebody about a specific account, because a person understands forty-one days and has no intuition at all for 8.75 times.
What moves it
A falling ratio usually means one of three things: you have taken on a large customer who pays slowly, your invoices are going out later than they used to, or a few old invoices have stopped moving and are dragging the average up. The aging calculator separates the third case from the first two in about a minute.
Related calculators
- DSO calculatorDays sales outstanding, and what shortening it releases
- AR aging calculatorThe balance owed, split by how overdue it is
- Bad debt calculatorWrite-offs as a percentage, and what they cost to replace
Questions people ask
How do you calculate accounts receivable turnover?
Divide net credit sales for the period by average accounts receivable, where average receivables is the opening balance plus the closing balance divided by two. $420,000 of credit sales against $48,000 of average receivables is 8.75 times.
What is the accounts receivable turnover formula?
Accounts receivable turnover = net credit sales / average accounts receivable. Days to collect = days in the period / turnover.
What is a good accounts receivable turnover ratio?
It depends entirely on your terms. Over a year, customers paying exactly on net 30 terms give a ratio of about 12, and net 60 about 6. Compare your ratio with the one your own terms imply.
How do you convert turnover into days?
Divide the number of days in the period by the turnover ratio. 365 divided by 8.75 is 41.7 days, which is the average time to collect.
Is turnover the same as DSO?
They are two views of the same figure. Days in the period divided by the turnover ratio gives days sales outstanding. This page shows both.
Should the numerator be total sales or credit sales?
Net credit sales: sales on terms, less returns and allowances. Cash and card sales never sat in receivables, so including them inflates the ratio and makes collection look faster than it is.
Why use average receivables rather than the closing balance?
One large invoice landing near period end would distort the closing balance and the ratio with it. Averaging the two ends smooths that out.
Is a higher accounts receivable turnover better?
Usually, because it means you collect quickly. Occasionally a very high ratio means your terms are so tight that customers who need thirty days go elsewhere, which is worth checking against the work you are not winning.
Can I calculate this monthly?
Yes. Use that month's credit sales and that month's opening and closing receivables, and set the period to 30 days. Monthly figures are noisier but they show a problem months before an annual number does.
Where do I find these numbers?
Opening and closing receivables come off the balance sheet at each end of the period. Credit sales is revenue less cash and card takings, from the profit and loss or a sales report.