One of the best financial metrics for keeping track of how quickly and effectively your business can turn credit sales into cash is the accounts receivable (AR) turnover ratio. 

Generally, the higher your AR turnover ratio, the faster your business can convert customer credit into cash, cover your day-to-day expenses and plan for growth. 

When you receive payments quickly from your customers, you have a steadier flow of cash on hand to keep your business running smoothly. 

Knowing how to calculate and improve your accounts receivable turnover ratio can help you better manage your accounts receivable and maximize your cash flow.

Find out what the accounts receivable turnover ratio is, how to calculate and interpret it, what factors may affect it, and which steps will help you improve it.

What is the accounts receivable turnover ratio?

The accounts receivable (AR) turnover ratio (also called the debtor turnover ratio or AR ratio) shows how quickly and effectively your business can turn credit sales into cash flow. Put simply, it’s a measure of how well you manage customer payments and collections:

• High ratio: Quicker customer payments and a more efficient collections process.
• Low ratio: Slower customer payments and less efficient collections.

In short, your AR turnover ratio is a key indicator of how well your business is managing cash flow and collections.

Purpose of the accounts receivable turnover ratio

If you’re a small or medium-sized business owner, tracking your accounts receivable turnover ratio can help you better manage 4 crucial areas of cash flow:

1. Liquidity: You can determine whether you have enough incoming cash to pay your rent, payroll, and other operating expenses by keeping an eye on your accounts receivable turnover.
2. Credit policy: Monitoring your AR ratio enables you to assess if your policy encourages timely payments or gives clients excessive wiggle room.
3. Financial planning: Cash flow forecasts and business budgets tend to be more realistic when you know how soon you can collect receivables. You can use our small business budget template to make better predictions.
4. Industry comparisons: You can determine whether your payment terms are in line with your competitors by comparing your AR ratio to industry averages. 

When your accounts receivable turnover ratio is low, your cash flow is unstable. You might be in a better position to pay off debt, reinvest your profits, or approach lenders for loans when it's trending higher.

How to calculate the accounts receivable turnover ratio

The accounts receivable turnover ratio formula is simple:

Net Credit Sales ÷ Average Accounts Receivable = Accounts Receivable Turnover Ratio

• Net credit sales: Sales made on credit, less returns, discounts, and allowances, are known as net credit sales.
• Average accounts receivable: The sum of your period's opening and closing receivables, divided by 2, is your average accounts receivable. 

Here’s how to calculate accounts receivable turnover ratio step by step.

In other words, this business converts its accounts receivable, a current asset on its balance sheet, into cash in about a month. This suggests that its customers make their payments on schedule and its collection procedure is reasonably effective.

Interpreting the accounts receivable turnover ratio

You can learn a great deal about your credit policies, customer payment habits, and the stability of your cash flow from a high or low ratio.

High ratio

In general, a high AR turnover ratio indicates a strong customer base and an efficient collections process. When your customers make timely payments, you can count on a healthier cash flow to run your business.

A very high ratio, however, can mean that your credit policies are too strict. If your payment terms are too stringent, you may lose out on new business opportunities or damage your customer relationships.

Low ratio

A low AR turnover ratio can be a sign that your customers pay too slowly, or you need to make changes to your invoicing procedures and collections process. Otherwise, you could, in turn, face cash flow problems over time.

A low ratio may also mean that you’re offering overly generous credit terms to secure sales. This may promote business growth, but if not managed carefully, it could increase the risk of cash flow issues down the road.

What is a good accounts receivable turnover ratio?

A universally accepted "good" ratio does not exist. Your industry, clientele, and payment terms all play a role here.

Retail and grocery businesses frequently have high ratios because most of their sales are made with cash or credit cards. On the other hand, manufacturing and B2B (business-to-business) companies often see lower ratios since they typically offer longer, more flexible payment terms.

Instead of trying to get the highest ratio possible, your real goal should be to match industry standards. You should also track your accounts receivable turnover ratio over time, which can give you more useful insight than just looking at a fixed number.

Factors affecting the accounts receivable turnover ratio

A number of factors can affect your ratio, and most of them are within your control. Everything from your credit terms and customer payment habits to the state of the economy can determine whether your turnover ratio trends higher or lower.

Here are the main factors that impact your accounts receivable turnover ratio:

• Credit policies: A tight credit policy may increase your ratio but lower sales. Although flexible terms can boost sales, they can also slow down collections.
• Economic conditions: During recessions, customers might take longer to make payments.
• Customer payment habits: Regardless of your payment terms, some customers consistently make late payments.
• Internal procedures: Inadequate payment instructions or late invoices can unnecessarily reduce your AR turnover ratio.
• Technology: Using accounting software like QuickBooks for reminders and invoicing can make the collections process more effective.

Accounts receivable turnover ratio examples

Every business operates on its own timeline when it comes to invoicing and collecting payments. By looking at a few real-life scenarios, you can see how everyday practices—like how fast you send invoices or the way your payment terms are structured—may translate into higher or lower ratios over time.

High ratio example

A Toronto dental clinic bills both patients and insurance companies for its services. The clinic, which has clear payment terms and few insurers, collects most balances within 30 days. With a ratio of 10, it converts receivables into cash roughly every 36 days.

Low ratio example

A landscaping company in British Columbia routinely sends its invoices late. Despite the fact that its customers are reliable payers, the invoicing delays cut its ratio to 3.3. This means it collects receivables about every 4 months, restricting its cash flow and potential for growth.

Limitations of the accounts receivable turnover ratio

Although the AR turnover ratio is a useful financial metric, it doesn’t offer the complete picture on its own. It shows how quickly your business collects payments, but it leaves out important details that can make the number easy to misinterpret.

Here are the main limitations of the ratio: 

• Industry differences: It’s not very meaningful from a financial standpoint to compare a manufacturer to a grocery store. Context is important.
• Customer reliability: You cannot determine which customers of yours are the most profitable or high-risk with this ratio.
• Seasonality: Depending on when you do the calculation, you may see skewed ratios if you have a seasonal business.
•  Timing problems: If your receivables fluctuate significantly, your beginning and ending balances may skew the average.

To get a much fuller picture, you should always use accounts receivable turnover ratio with tools like accounts receivable aging reports, which indicate the length of time your invoices have been past due.

Tips to improve the accounts receivable turnover ratio

To improve your accounts receivable turnover ratio, you will need to streamline your internal procedures and simplify your payment process for customers. 

Here are 6 practical tips you can apply to improve their ratio: 

1. Send your invoices promptly: Provide your customers with clear invoices right after each sale.
2. Spell out your terms: Clearly indicate your terms in contracts and invoices to help prevent late payments.
3. Offer payment options: Give your customers a choice of payment methods, including credit card, bank transfer, and online payments.
4. Automate reminders: Use accounting software to set up automated payment reminders for your customers.
5. Incentivize early payments: Encourage faster payments with early payment discounts.
6. Monitor trends: Track your AR turnover trends to promptly identify payment issues and adjust your internal procedures.

Turn insights into action with QuickBooks

You don't have to create and manage more spreadsheets to stay on top of your accounts receivable turnover ratio.

What's important is to analyze your ratio, benchmark it to industry standards, and improve your credit policies and collections process.

QuickBooks helps you do it all seamlessly and cost-effectively.

Our accounting software automatically delivers invoices right after a sale, sends personalized reminders to keep customers on track, and shows you your AR turnover in real time—so you always know how much money you have coming in and going out. 

To get started, find the QuickBooks plan that works for you today.

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