Accounts Receivable Turnover Ratio Formula + Calculator

If you’re in construction, you’ll want to research your industry’s average receivables turnover ratio and compare your company’s ratio based on those averages. A well-crafted credit policy can help minimize the risk of late payments or defaults by customers, which can, in turn, improve the receivables turnover ratio. If you’re struggling to get paid on time, consider sending payment reminders even before payment is due. Implement late fees or early payment discounts to encourage more customers to pay on time. If you can, collect payment information upfront to automatically collect when payment is due.

Accounts receivable reflects the money owed to the company by its customers. In this example, the company’s accounts receivable turnover is 11.76, which suggests that it is collecting its receivables nearly 12 times throughout the accounting period. Companies can use this information to assess their performance and make any necessary adjustments to improve their credit and collection practices. The Receivables Turnover Ratio (RTR) is an important efficiency metric that measures how well a company collects on its receivables, or the credit it extends to customers.

What is a Good Receivables Turnover Ratio?

In most cases, companies perform better by extending more credit to customers, not less, even if this means a slightly higher receivable turnover ratio. It is therefore vital to only compare turnover ratios of companies in like industries that have similar business models. The lower a company’s AR turnover ratio is, the longer and more difficult it is to collect from its debtors.

A high receivables turnover ratio might also indicate that a company operates on a cash basis. If Alpha Lumber’s turnover ratio is high, it may be cause for celebration, but don’t stop there. Company leadership should still take the time to reevaluate current credit policies and collection processes. Then, they should identify and discuss any additional adjustments to those areas that may help the business receive invoice payments even more quickly (without pushing customers away, of course).

Reward Efficient Payments

Your accounts receivable turnover ratio measures your company’s ability to issue a credit to customers and collect funds on time. Tracking this ratio can help you determine if you need to improve which of the following represents the receivables turnover ratio? your credit policies or collection processes. Additionally, when you know how quickly, on average, customers are paying their debts, you can more accurately predict cash flow trends.