Accounts ReceivableTurnover Ratio

How is it calculated?

Accounts Receivable Turnover Ratio = Revenue / Average Accounts Receivable Balance

Goal of the Ratio

The goal of this ratio is to determine how promptly your borrower’s customers pay their bills.  The ratio which divides the borrower’s average accounts receivable balance into their annual revenue shows how many times the borrower extended and then collected their accounts receivable during the year.

When the ratio increases, it means the borrower’s customers more promptly pay its bills.  When this ratio decreases, it means the borrower’s customers are slow to pay their bills.

This ratio should be viewed in the context for what is typical for their industry.  If you find that the borrower receives payment slower than the peer average, it is possible to save the borrower some money over the course of the year.  Accounts receivable typically do not carry an interest rate unless their payment is not received during the prescribed credit terms.  That means if its customers are paying late or maybe the borrower is offering too long of repayment terms for the industry, if they were able to reduce their terms, they would have more cash around that could then be used to pay down their operating line of credit, and ultimately save some income by paying less interest during the year. 

When is it used?

This ratio is used when the borrower has a high degree of accounts receivable.   

Rules of Thumb

There is no rules of thumb for this ratio, but rather this ratio should be viewed in the context of what is typical for the industry.  

What changes in the ratio could mean:

Some example reasons why the Accounts Receivable Turnover Ratio can change:

Increases

1. The borrower reduced the credit terms they offer their customers
2. The borrower is experiencing a recent drop in revenue
3. The borrower’s customers are paying more promptly

Decreases

1. The borrower extended the credit terms they offer to their customers
2. The borrower is experiencing a recent increase in revenue
3. The borrower’s customers are paying more slowly 

Other Relevant Terms

• Capital
• Balance Sheet
• Working Capital
• Days Receivable Outstanding
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