accounts receivable turnover
A metric measuring how efficiently a company collects its receivables, calculated by dividing net sales by average accounts receivable.
Example
“An AR turnover of 12 means the company collected its receivables and replaced them 12 times per year — every 30 days.”
Memory Tip
AR TURNOVER = how fast you're collecting money owed. Higher = faster collection = better cash flow.
Why It Matters
Understanding accounts receivable turnover helps you assess how quickly a company converts sales into actual cash. For investors and business owners, a higher turnover ratio indicates better operational efficiency and healthier cash flow, which directly impacts a company's ability to pay dividends, reinvest, and weather financial challenges.
Common Misconception
Many people believe that a higher accounts receivable turnover is always better without considering industry context. However, some industries naturally have longer payment cycles, and comparing a retail company's turnover to a B2B manufacturer's turnover can lead to incorrect conclusions about financial health.
In Practice
Imagine Company A has net sales of 500,000 dollars with average accounts receivable of 50,000 dollars, resulting in a turnover ratio of 10. This means the company collects its receivables 10 times per year, or roughly every 36 days. If Company B in the same industry has a turnover of only 5, it takes twice as long to collect payment, suggesting potential cash flow problems or less effective collection practices.
Etymology
How many times ACCOUNTS RECEIVABLE are TURNED OVER (collected and replaced) in a period.
Common Misspellings
Small business accounting made simple
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