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.

How to calculate Accounts Receivable Turnover Ratio?

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Recievable

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.