Accounts Receivables Turnover Ratio Calculator

Use the Accounts Receivables Turnover Ratio Calculator to calculate the the quality of receivables and credit sales, the higher the Turnover Ratio, the better the collection frequency of credit sales. Accounts Receivables Turnover Ratio is an important factor when securing a business loan.

Accounts Receivables Turnover Ratio Calculator
Accounts Receivables Turnover Ratio Calculator Results
Receivables Turnover Ratio:
[ 1 Votes ]

What are Accounts Receivable?

Accounts receivable is the money owed by the customers to the firm, the remaining amounts are paid without any interest.

Given the principle of time value of money, low turnover rates means the business loses more money.

Accounts Receivables Turnover Ratio Calculator. This image provides details of how to calculate the Accounts Receivables Turnover Ratio using a calculator and notepad. By using the Accounts Receivables Turnover Ratio formula, the ARTR Calculator provides a true calculation of the quantify of the effectiveness of your company's ability to collect its credits that are owed by its clients

Accounts Receivable Turnover Ratio - What does it mean?

If you are running a business no matter the size, micro, small medium or large, and you want to maximize your profits, you need to offer credit sales to your customers. A Challenge that arises when providing credit sales however is that you can block your money for a certain period of time, which makes it crucial to have a good accounting approach towards collecting the receivables from clients to actually materialize the profits.

The accounts receivable turnover ratio helps you quantify the effectiveness of your company's ability to collect its credits that are owed by its clients, it shows how effectively a company has been collecting the receivables it extends to its customers.

Account receivable turnover ratio calculator

An online calculator helps you go through the calculations swiftly. It requires only 2 data fields to be filled accurately to give you the correct ratio.

  • Net credit sales - This field requires you to add the net sales amount that you have attained over a particular period. Gross sales minus the payments which are already received will give you this number.
  • Average account receivables - Average account receivables can be calculated by adding the beginning and ending numbers of account receivables and dividing it by two.

Account receivable turnover ratio can be calculated for any period of time, it can be a year, a quarter or a month, for example, if you want to calculate annual ratio you need to input yearly net sales that are done on credit.

High vs. Low Account Receivables

Accounts receivable turnover ratio majorly depends on average account receivables of any company, though generally high and low account receivables mean high and low quantity of effectiveness of credit collection of a company yet it can also impact differently. Let's understand how:

High accounts receivable turnover ratio

A high accounts receivable turnover ratio can indicate the high efficiency in debt collecting, quality customers and conservative credit policy, and sometimes it also means that the company majorly operates on a cash basis.

However, if the company is using a really tight credit policy it might start losing its client base, which means they should reconsider their policies even if it means a slight decrease in accounts receivable turnover ratio.

Low accounts receivable turnover ratio

A low accounts receivable turnover ratio could show low effectiveness on collection of receivables due to bad credit policy and poor clientele. This could be resolved by taking immediate actions on improving the credit policies of the company. It can result in growth as there will be enough cash flow available with the collection of long due payments.

The Calculator for Investors

If you are an investor considering investing in a company, you should check its account receivable turnover ratio and look for a high ratio. In fact, ratios play an important part in several areas of investment. Generally, a high ratio will be an indicator that the company has a good credit policy and good customer base, which means a high probability that your investments will be safe and hopefully start growing.

Investors can also use the iCalculator's ARTR (Account Receivable Turnover Ratio) calculator to compare the account receivable turnover ratio of a company for past and present years; this could be a better way to see how the company has been growing over the years.

Investors can also use it to compare the ratio of different companies in the market because generally companies from the same industry operates in a similar way and should have similar accounts receivable turnover ratio. This investment comparison approach is not recommended for the comparison of companies operating in different industries.

Limitations for Investors

There can also be some limitations for investors when it comes to calculating the ratio as certain industries have a seasonal effect on their operations with peak and troughs in turnover as there demand fluctuates. This fluctuation can distort the ratio if a non-annualized net turnover is used for comparison. An additional consideration is the use of baseline figures for the ratio calculation. Some companies use total sales instead of net sales, the result is an inflated ratio calculation. Companies may do this accidentally or for a specific reason, it is not necessarily a deliberate attempt to mislead investors. Regardless of the why Investors must remain vigilant and understand how a ratio is calculated before making decisions on whether to invest or not.

Benefits of using the calculator

When you use a calculator to measure the Account Receivable Turnover Ratio, you will have a clear picture of how effectively and how many times in a year (or whichever period you want to consider) you are making the collections of your receivables. It will benefit you in different ways as mentioned below:

  • Credit policy - Results from the calculator will help you figure out how tight or lenient credit policies are, this will help you make better decisions for your future collections.
  • Quality customers - By analyzing the results in your hand you will also get to know what kind of clientele your company whom you are offering your products/ services on credit, and you can start taking required decisions for resolving the problems, should there be any.
  • Proportion of cash - Review of results given by the calculator will also enable you to check whether you are offering enough business on credit or you might need to start moving towards doing business on cash a bit more to improve your accounts receivable turnover ratio.
  • Growth of the company - These all factors will help you make better decisions for your company's financial health and that will surely result in taking your company towards a better future.