How is accounts receivable turnover calculated?

The accounts receivable turnover ratio measures how efficiently a company collects its receivables and is an important indicator of its liquidity and overall financial health. The correct method for calculating this ratio involves dividing net credit sales by average net accounts receivable.

Net credit sales represent the revenue generated from credit sales (sales made on credit, excluding cash sales), while average net accounts receivable is calculated by taking the sum of the beginning and ending accounts receivable balances for a period and dividing by two. This ratio gives insight into how often a business collects its average accounts receivable balance over a specific time period, typically a year.

A higher accounts receivable turnover indicates that a company is effective at collecting its credit sales, meaning it has strong cash flow and management of its receivables, while a lower ratio could suggest inefficiencies or difficulties in collecting payments from customers.