As a result, companies must collect them, which requires an effective credit and collection policy. Problems can arise because not all customers pay bills on time. Then, after receiving payment, the company reports an increase in cash and a decrease in accounts receivable at the same amount. Thus, although the revenue figures in the income statement increased during this period, but not with the company’s cash. In preparing financial statements, companies report accounts receivable on the balance sheet and revenue on the income statement before receiving cash payments. So, the company receives cash payments not on the day the goods are delivered but several days after. Accounts receivable arise when the customer has received the goods but has not paid when the accounting report is prepared. Management and financial analysts scrutinize it carefully as it affects liquidity. We can convert it to days of sales outstanding to show how many days on average a company collects payments for recorded sales during the accounting period. Why do the accounts receivable turnover ratio matter?Īccounts receivable turnover ratio is a metric for comparing total sales revenue with actual customer payments. When the company is efficient and effective in collecting payments from customers, it will have a higher receivables turnover ratio. It gives us an understanding of how well the company manages the credit they give their customers and how quickly it collects money from customers. It measures the number of times it collects accounts receivable on average during the accounting period. What is the accounts receivable turnover ratio measured?Īccounts receivable turnover ratio is a financial ratio to help measure the company’s financial health. Therefore, it is important to compare the figures with other companies in the same industry to provide objective insight. Thus, the company is trying to increase the receivables turnover ratio to increase revenue.Īs with other financial ratios, the ideal accounts receivable turnover rate may vary between businesses in different industries. Conversely, a higher accounts receivable turnover ratio means the company collects payments from customers more quickly. Since accounts receivable represent a potential source of cash inflows for the company, a low ratio can lead to cash flow problems.

What’s it: Accounts receivable turnover is a financial ratio showing the number of times a business converts accounts receivable into cash.