What is accounts receivable turnover?
The accounts receivable turnover ratio shows how efficiently a business converts credit sales into cash. A higher ratio means customers pay faster; a lower ratio suggests slow collections, loose credit terms or bad debts.
Formula
AR turnover = Net credit sales ÷ Average accounts receivable
Average AR = (Opening AR + Closing AR) ÷ 2
To express it in days, calculate days sales outstanding (DSO): 365 ÷ AR turnover.
Example
A business has $600,000 of annual credit sales. Receivables were $40,000 at the start of the year and $60,000 at the end, so average AR is $50,000.
- AR turnover = 600,000 ÷ 50,000 = 12 times
- DSO = 365 ÷ 12 ≈ 30 days
On average, customers pay about a month after invoicing.
How to interpret it
- Compare against your own payment terms: 30-day terms with a 50-day DSO means customers are paying late.
- Compare against industry peers, since norms vary widely.
- Watch the trend over time rather than a single number.
How to improve it
- Invoice immediately and accurately.
- Shorten terms or offer early-payment discounts.
- Automate reminders and follow-ups.
- Check customer credit before extending terms.