How to calculate your accounts receivable turnover ratio

According to 2024 Quickbooks Small Business Insights, 48% of small business owners identified cash flow as a problem in their business. And more than half of them cite outstanding receivables as their biggest cash flow pain point. But nearly half of them claim those cash flow challenges came as a surprise.

Calculating your accounts receivable turnover ratio can help you avoid negative cash flow surprises. Knowing where your business falls on this financial ratio allows you to spot and predict cash flow trends before it’s too late. Tracking this ratio is a bookkeeping staple.

• What is the accounts receivable turnover ratio?
• Why is it important to track accounts receivable turnover?
• How to calculate your accounts receivable turnover ratio
• Accounts receivable turnover ratio example
• Making decisions based on your accounts receivable turnover ratio
• How to improve your receivables turnover ratio
• How to track your receivables
• Advanced AR turnover ratio calculation techniques
• Implement good tracking habits to your accounts receivable management

What is the accounts receivable turnover ratio?

The accounts receivable turnover ratio, or debtor’s turnover ratio, measures how efficiently your company collects revenue. Your efficiency ratio is the average number of times that your company collects accounts receivable throughout the year. An accounts receivable turnover ratio of 12 means that your company collects receivables 12 times per year or every 30 days, on average.

A higher accounts receivable turnover ratio indicates that your company collects funds from customers more often throughout the year. On the flip side, a lower turnover ratio may indicate an opportunity to collect outstanding receivables to improve your cash flow.

The accounts receivable turnover ratio is a type of efficiency ratio. Efficiency or quick ratios measure a business’s ability to manage assets and liabilities in the short-term. Other examples of efficiency ratios include the inventory turnover ratio and asset turnover ratio. Efficiency ratios can help business owners reduce the amount of time it takes their business to generate revenue.

Why is it important to track accounts receivable turnover?

Your AR turnover ratio measures your company’s ability to issue credit to customers and collect funds on time. Tracking this ratio can help you determine if you need to improve your credit policies or collection procedures. Additionally, when you know how quickly, on average, customers pay their debts, you can more accurately predict cash flow trends. And if you apply for a small business loan, your lender may ask to see your accounts receivable turnover ratio to determine if you qualify.

It’s important to track your accounts receivable turnover ratio on a trend line to understand how your ratio changes over time.

A higher ratio can mean a few things:

• You have a conservative credit policy. A too-high ratio can indicate that your credit policy is too aggressive. Your credit policy may be dissuading some customers from making a purchase. If your ratio is consistently very high, you may want to consider loosening your credit policy to make way for new customers.
• You have an efficient collections department. And you have high-quality customers. A high ratio indicates that your customers pay their debts on time. This means your collection methods are working, and you’re extending credit to the right customers.
• You operate mostly on a cash basis. Your accounts receivable turnover ratio will likely be higher if you make cash sales primarily.

A lower ratio can indicate a few things:

• Your collections policies aren’t working. A low ratio, or a declining ratio, can indicate a large number of outstanding receivables. If that’s the case, this is a good opportunity to revisit your collection policies and collect invoices past due or late payments.
• Your credit policies are too loose. If your ratio is too low, it may indicate that your credit policy is too lenient. The result is “bad debt.” Bad or uncollectible debt occurs when customers can’t pay. Consider revamping your credit policy to ensure you’re only extending credit to the right customers.
• Your customers are struggling to meet your payment terms. If your payment terms are too stringent, customers may struggle to meet them. And they might avoid making future purchases from your business because of it. If your ratio is low, take a look at your payment terms. Consider offering more payment methods or payment plans for customers struggling to pay.

How to calculate your accounts receivable turnover ratio

Calculating your accounts receivable turnover ratio is simple. You can find all the information you need on your financial statements, including your income statement or balance sheet.

First, you’ll need to find your net credit sales or all the sales customers made on credit. Invoices indicate a credit sale to a customer. You collect the money from credit sales at a later date.

Step 1: Determine your net credit sales

First, you’ll need to find your net credit sales or all the sales customers made on credit. Invoices indicate a credit sale to a customer. You collect the money from credit sales at a later date.

• Start by identifying all sales made on credit during the accounting period. These are typically represented by invoices issued to customers.
• Subtract any sales returns or allowances from the total credit sales. This gives you your net credit sales.
• You can usually find this information on your income statement or balance sheet.

The formula for net credit sales follows:

Sales on credit – sales returns – sales allowances = net credit sales

 Step 2: Calculate your average accounts receivable

Average accounts receivable is the sum of starting and ending accounts receivable over an accounting period, divided by two. You can find total accounts receivable on your balance sheet. The formula for average accounts receivable follows:

 (Starting accounts receivable + ending accounts receivable) ÷ 2 = average accounts receivable

Step 3: Calculate the accounts receivable turnover ratio

Then divide your net credit sales (from Step 1) by your average accounts receivable (from Step 2) to find your accounts receivable turnover ratio. The accounts receivable turnover ratio formula is as follows:

Net credit sales ÷ average accounts receivable = accounts receivable turnover ratio

What is the normal range for accounts receivable turnover?

Broadly speaking, the normal accounts receivable turnover range generally falls between 4 and 12. But what’s considered a "good" ratio varies by industry, as some industries have ratios that typically fall outside of this range.

It's important to compare your ratio to industry benchmarks and consider your business model and credit policies. A higher ratio generally suggests you're collecting payments quickly, while a lower ratio might indicate potential collection process issues. 

What is a bad accounts receivable turnover?

A "bad" accounts receivable turnover ratio is one that is significantly lower than the average for your industry or your historical performance.

A low turnover ratio suggests that your business is taking longer to collect payments from customers. This can lead to cash flow problems and impact your overall financial health. It's important to investigate the reasons for a low ratio and take steps to improve your collection efficiency.

Accounts receivable turnover ratio example

Centerfield Sporting Goods had $250,000 in net credit sales in 2024. They found this number using their annual income statement.

The company’s average accounts receivable for 2024 was $50,000. They found this number using their January 2024 and December 2024 balance sheets. At the beginning of the year, in January 2024, their accounts receivable totaled $40,000. In December 2024, their accounts receivable totaled $60,000. To find their average accounts receivable, they used the average accounts receivable formula.

($40,000 + $60,000) ÷ 2 = $50,000

To find their accounts receivable turnover ratio, Centerfield divided its net credit sales ($250,000) by its average accounts receivable ($50,000).

$250,000 ÷ $50,000 = 5

Their accounts receivable turnover ratio is 5. They collect average receivables five times per year or every 73 days.

Centerfield Sporting Goods specifies in their payment terms that customers must pay within 30 days of a sale. Their lower accounts receivable turnover ratio indicates it may be time to work on their collections procedures. In doing so, they can reduce the number of days it takes to collect payments and encourage more customers to pay on time.

Making decisions based on your accounts receivable turnover ratio

In general, a higher turnover ratio is better for your business. A higher turnover ratio means you don’t have outstanding receivables for long. Your customers pay quickly or on time, and outstanding invoices aren’t hurting your cash flow.

However, a turnover ratio that’s too high can mean your credit policies are too strict. You may be alienating potential customers. Use your turnover ratio to determine if there’s room to loosen your policies and make way for more sales.

A lower ratio means you have lots of working capital tied up in outstanding receivables. You may have an inefficient collections process, or your customers may be struggling to pay. Use your ratio to determine when it’s time to tighten up your credit policies. You can use it to enforce collections practices or change how you require customers to pay their debts. Customers struggling to pay may need a gentle nudge, a payment plan, or more payment options.

How to improve your receivables turnover ratio

If your accounts receivable turnover ratio is lower than you’d like, there are a few steps you can take to raise the score right away.

Improve your collection process

Your collection process determines how you collect funds from customers. 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 so that you can automatically collect it when payment is due.

Include clear payment terms

Your customers might not realize their payments are past due. Encourage more customers to pay on time by setting a clear payment due date, sending detailed invoices, and offering additional payment options.

Make payments easy

If you only accept one payment option, you may be creating a roadblock to getting paid. Accepting a variety of payment options like credit cards or digital payments removes any unnecessary barriers.

Build strong relationships

Happy customers who feel invested in you and your business are more likely to pay up on time—and come back for more. Focus on building strong personal relationships with your customers to keep the cash flow coming in.

Use cloud software

Cloud-based accounting software, like QuickBooks Online, makes the process of billing and collecting payments easy. Automate your collections process, track receivables, and monitor cash flow in one place.

How to track your receivables

If you’re not tracking receivables, money might be slipping through the cracks in your system. Make sure you always know where your money is (and where it’s going) with these tips.

1. Put someone in charge of tracking receivables

Whether you use accounting software or not, someone needs to track money in and money out. This person or team should review receivables regularly—weekly is best. They can contact customers as soon as a payment is past due. The faster you catch a missed payment, the faster (and more likely) your customer can pay.

2. Record sales and payments

Keep an accurate record of all sales and payments as soon as they happen. At the very least, record transactions once per week. Keep copies of all invoices, receipts, and cash payments for easy reference. And create records for each of your vendors to keep track of billing dates, amounts due, and payment due dates. If that feels like a heavy lift, c life, consider investing in expense tracking software that does the organizing for you.

3. Establish payment terms and credit policies

Strong payment terms encourage customers to pay on time. They’re more likely to pay when they know exactly when their payment is due and what they’re paying for. Your credit policy should help you assess a customer’s ability to pay before extending credit to them. Lenient credit policies can result in bad debt, cash flow challenges, and a low turnover ratio.

Advanced AR turnover ratio calculation techniques

The standard accounts receivable turnover ratio provides valuable insights into your collection efficiency. However, more advanced calculation techniques can offer an even deeper understanding of your AR trends. Consider the following methods and if they could help you forecast future performance and make more informed decisions.  

Accounting for seasonality 

Many businesses have seasonal fluctuations in sales and customer payment patterns. Consider a retail store that experiences a holiday season sales surge, followed by a slower first quarter. Or a restaurant that serves an annual influx of summer tourists. These seasonal variations can skew your AR turnover ratio, making comparing performance across different periods challenging.   

Apply seasonal adjustments to your AR turnover ratio calculations to address these scenarios. Compare your current ratio to the same period in previous years, taking into account the typical seasonal trends. Adjusting for seasonality presents a more accurate picture of your collection efficiency.

Leveraging predictive analytics

Analyzing historical data can be a powerful strategy for forecasting future AR turnover ratios. Look at past trends related to your sales, payment patterns, and economic conditions to develop predictive models that estimate future collection performance. This approach can help you:

Anticipate potential cash flow challenges

If your model predicts a decrease in your AR turnover ratio, you can proactively take steps to improve collections and manage your cash flow.

Optimize credit policies

By understanding the factors influencing your AR turnover ratio, you can adjust your credit policies to minimize risk and encourage timely payments.   

Set realistic goals

Predictive analytics can help you set realistic AR turnover ratio targets based on past trends and anticipated market conditions.

Keep in mind that predictive analytics depends heavily on the quality and quantity of historical data available.

Implement good tracking habits to your accounts receivable management

If your small business lets customers set up credit accounts, good tracking habits and accounts receivable management help you keep your accounts receivable turnover ratio high and your cash flow stable. 

QuickBooks Online has tracking tools that provide fast, easy reports on numerous financial metrics, including assets such as accounts receivable. Keep your books accurate and up to date automatically. Change the way you manage your finances now.