AR Turnover Ratio
A measure of how efficiently a company collects its receivables, calculated as net credit sales divided by average AR.
Definition
The AR (Accounts Receivable) Turnover Ratio measures how many times per year a company collects its average receivables. It's calculated by dividing net credit sales by average accounts receivable. A higher ratio indicates faster collection; a lower ratio suggests slower collection or potential issues.
For example, if annual credit sales are $1,200,000 and average AR is $100,000, the AR turnover ratio is 12—meaning receivables are collected 12 times per year, or roughly monthly. This can be converted to days by dividing 365 by the ratio (365/12 = 30.4 days average collection period).
Why It Matters
AR turnover reveals collection efficiency at a glance. It's useful for comparing your performance to industry benchmarks or tracking changes over time. A declining ratio warrants investigation—are customers paying slower, or are credit policies loosening?
Lenders and investors often examine AR turnover as an indicator of operational efficiency and cash flow quality. Strong AR turnover suggests a healthy business that converts sales to cash quickly.
Examples
- 1
A company with $2.4M annual credit sales and $200K average AR has an AR turnover of 12, meaning they collect receivables monthly on average.
- 2
A business sees AR turnover drop from 12 to 8 over two years, indicating collections have slowed from 30 to 45 days.
- 3
An industry benchmark shows AR turnover of 10 is typical; a company at 6 investigates their credit and collection policies.
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