# How to Calculate Your Accounts Receivable Turnover

Camino Financial09 Jan 2024

## What is Accounts Receivable Turnover?

In a nutshell, accounts receivable turnover refers to how often your business collects its accounts receivable throughout the year. This ratio is typically calculated on a yearly basis and can be used to measure how efficient your business is at collecting debts from credit issued to customers. More simply, it measures how often your business is able to turn your accounts receivable into cash during a year.

## Accounts Receivable Turnover Ratio Formula

Learning how to calculate your accounts receivable turnover ratio is incredibly useful. This ratio can help you more effectively manage your business’ finances and can help you identify where some of your cash flow problems may be coming from. Fortunately, calculating this ratio is fairly easy. The formula is as follows:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
It’s important to use net credit sales instead of net sales since only credit sales create accounts receivable. Cash sales are left out because you can’t collect on money that you’ve already been paid.

## Steps to Calculate Your Accounts Receivable Turnover

A formula is only good if you know how to use it. Fortunately, learning how to use this one is as easy as following a few simple steps.

### 1. Find Your Net Credit Sales

First, to use the formula above, you need to find your company’s net credit sales — that is, all sales made on credit rather than cash. This figure should be on your balance statement or your business’ yearly income statement. It should include all of your credit sales minus any allowances or returns.

### 2. Calculate Your Average Accounts Receivable

Next, you need to find your average accounts receivable. Accounts receivable is any money that is owed to you by your customers. To calculate your average accounts receivable, you need to add the value of your accounts receivable from the start of the year to the value of your accounts receivable at the end of the year. Then, divide this number by two. Your accounts receivable numbers from the beginning and end of the year should be on your business’ balance sheet.

### 3. Calculate Your Accounts Receivable Turnover Ratio

Once you have your net credit sales and average accounts receivable, you can plug these numbers into the formula outlined in the section above. All you need to do is divide your net credit sales by your average accounts receivable. By doing this, you’ll be able to see how effective your small business is at collecting debt from customers.