Accounts Receivable Turnover

Accounts Receivable Turnover Ratio

Accounts receivable turnover is the ratio of net credit sales to average accounts receivable during a period. It is a ratio that measure the effectiveness of extending credit as well as collecting debt.

What is a receivables turnover ratio?

A low ratio implies an inefficiency in collecting sales and could be a sign of an impending danger while a high ratio means that a company either operates on a cash basis or they efficiently extend credit and collect on it.

Example of Accounts Receivable Turnover Ratio

Sample of How to Calculate Accounts Receivable

Company A has:

• Net Credit sales of \$1,000,000, for the year ending Dec 31,2013
• It’s accounts receivable at Jan 1st, 2013 and Dec 31, 2013 were \$125,000 and \$100,000.

Calculate the Accounts Receivable Turnover Ratio:

Solution:
Average Accounts Receivable = (\$125,000 + \$100,000) / 2 = \$112,500
Receivable Turnover Ratio = \$1,000,000 / \$112,500 = ~8.89

Real World Example of Accounts Receivable Turnover based on Walmart Inc as of (7/2014)

Walmart has:

• Net Credit sales of \$480,479 million for the trailing twelve months ending 7/2014
• It’s accounts receivable at period ending 7/2013 and period ending 7/2014 were \$7,689 million and \$6,883 million

Calculate the Accounts Receivable Turnover Ratio:

Solution:
Average Accounts Receivable = (\$5,996 million + \$6,146 million) / 2 = \$6,071 million
Receivable Turnover Ratio =  \$480,479 million / \$6,071 million = 79.14

What does a 79.14 mean?

Walmart is extremely efficient at turning over it’s accounts receivable and manages to extend credit, and collect debts well.