Expert in financial accounting, credit policy, and operational cash flow management.
The **Accounts Receivable (AR) Turnover Calculator** measures how efficiently a company collects its debts from customers. It is a critical metric for evaluating credit risk and cash flow health. Enter values for any three variables (Net Credit Sales, Average Accounts Receivable, AR Turnover Ratio, or Days Sales Outstanding) to solve for the missing one.
Accounts Receivable Turnover Calculator
Instructions: Enter values for any three of the four core parameters to solve for the missing one.
Receivables Metrics
Accounts Receivable Turnover Formulas
The calculation is based on the relationship between Net Credit Sales and Average Accounts Receivable, and the resulting Days Sales Outstanding:
AR Turnover Ratio ($ART$):
$$ART = \frac{NCS}{AAR}$$Days Sales Outstanding ($DSO$):
$$DSO = \frac{365}{ART}$$ Formula Source: InvestopediaVariables Explained (Q, F, P, V – Parameters)
- $NCS$ (Net Credit Sales, $Q$): Total sales made on credit (excluding cash sales) minus returns and allowances.
- $AAR$ (Average Accounts Receivable, $F$): Average balance of accounts receivable over the period (typically (BI + EI) / 2).
- $ART$ (AR Turnover Ratio, $P$): The number of times receivables are collected and turned into cash.
- $DSO$ (Days Sales Outstanding, $V$): The average number of days it takes for a company to collect revenue after a sale has been made.
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What is Accounts Receivable Turnover Ratio?
The **Accounts Receivable Turnover Ratio (ART)** is a measure of how effectively a company extends credit and collects debts from its customers. A high turnover ratio suggests that a company is collecting its accounts receivable quickly, which translates to better cash flow and less risk of bad debt. A low turnover ratio may indicate weak credit policies, inefficient collection procedures, or customers who are struggling financially.
The ratio is often analyzed alongside its derivative, **Days Sales Outstanding (DSO)**. DSO converts the ratio into an average number of days, providing a more intuitive measure of the average collection period. Companies usually aim for a DSO that is close to their stated credit terms (e.g., if terms are net 30, a DSO near 30 is ideal).
How to Calculate AR Turnover (Example)
Assume a company has Net Credit Sales ($NCS$) of \$800,000 and Average Accounts Receivable ($AAR$) of \$80,000. We solve for ART and DSO:
- Step 1: Calculate AR Turnover Ratio
$$ART = NCS / AAR = \$800,000 / \$80,000 = \mathbf{10.0}$$
- Step 2: Calculate Days Sales Outstanding
$$DSO = 365 / ART = 365 / 10.0 = \mathbf{36.5 \text{ days}}$$
This means the company collects its average accounts receivable balance **10 times** a year, with an average collection period of $\mathbf{36.5 \text{ days}}$.
Frequently Asked Questions (FAQ)
AR Turnover measures the efficiency of collecting credit sales. Cash sales are immediately collected and do not create receivables, so they must be excluded for an accurate analysis of the credit and collection function.
A high AR Turnover Ratio (and low DSO) is generally positive, indicating the company’s collections are efficient and its customers are paying quickly. This leads to better cash flow management.
While low DSO is usually good for cash flow, a DSO that is extremely low (e.g., much shorter than industry average or stated credit terms) might signal that the company’s credit policies are too strict, potentially costing them sales to competitors.
Average AR is typically calculated as the sum of Accounts Receivable at the beginning of the period and at the end of the period, divided by two: $AAR = (AR_{\text{start}} + AR_{\text{end}}) / 2$.