Accounts receivable turnover - formula and calculations

Sailing in the corporate waters can be quite tricky sometimes, especially when managing the accounts receivable (AR). The whole point of a business is to improve sales, expand profits, and scale its operations. And the core of it all is to have adequate cash flow. Understanding and optimising the accounts receivable turnover ratio can help handle the core motive while maintaining the company’s financial stability.

This metric helps businesses to evaluate how well they stand in terms of revenue management and whether the accounts receivable team is fulfilling its responsibilities right. Note that different industries in the UK will have varying normal ranges for their accounts receivable turnover ratio due to factors like credit terms and customer base. The protocols may differ when you’re dealing with overseas customers paying in different currencies.

Read more to learn about the accounts receivable turnover ratio, its formula, and some important FAQs about accounts receivable turnover calculation.

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What is accounts receivable turnover?

The accounts receivable turnover measures how quickly a business collects customer payments. The numbers show how often sales convert into cash during a specific accounting timeframe. Its calculation could be monthly, quarterly, or annual – depending upon the nature of business or industry.

Tracking accounts receivable is integral because it provides insight into the effectiveness of accounts receivable and the collection procedures involved. When the turnover ratio is high, it shows that your company collects its receivables in due time, which can improve liquidity and cash flow. In contrast, a low turnover ratio reflects an inefficient collection process, leading to poor financial health.

Monitoring this metric allows businesses to determine how to improve accounts receivable turnover. You can spot the weak elements in the process and work on those to get better at financial management. Accurate calculations can help in forecasting the future revenue landscape. It helps you paint a clear picture of the time it takes to convert revenue into solid cash.

Why is accounts receivable turnover calculation important?

You cannot undermine the importance of accounts receivable metrics regardless of your business size. If ignored, it may lead to serious cashflow setbacks. Do you know that 58% of the B2B invoices are overdue in the UK? ¹

What’s even more alarming is that 64% of the UK CFOs don’t track their Days Sales Outstanding regularly².

A business must have a strong hold on its finances to stay operational. Keeping an eye on the accounts receivable turnover ratio can help improve strategic decision-making and boldly plan budgets according to accurate cash flow predictions.

Managing the accounts receivable well can help your business in the following ways:

• Effective Policy Curation: Strong AR management improves credit control by tracking customer payments and spotting risks early. You can take proactive steps like credit checks, setting limits, and monitoring payment history.

• Forecast for the Future: Knowing exactly when a company can make large capital investments is important if a business plans to expand or introduce new measures like integrating an AR automation tool in the finance department.

• Maintain a Steady Cashflow: A survey by Intuit Quickbooks showed that 73% of UK businesses experience some kind of negative consequences due to late invoices³. Good accounts receivable management can help them keep a steady cash flow and free up money stuck in unpaid invoices.

• Analysis Against Competitors: By comparing financial ratios with its competitors, a business can see if it is leading in the industry or lagging.

• Enhances Customer Relationships: Managing accounts receivable well helps businesses build strong customer relationships. Clear communication about payments and timely follow-ups show professionalism, earning trust and loyalty.

A consistent practice of accounts receivable turnover calculation is the lifeblood of any business. After all, there’s a high chance of a business to fail if it doesn’t have a strong grip on its finances. Hence, you need to follow mitigation strategies when the finances don’t seem favorable enough.

Imagine Marks & Spencer, a popular UK retailer, checks its accounts receivable turnover in its financial report. If the ratio is 10, it means the company collects customer payments 10 times a year, showing that customers pay on time and cash flow is steady.

But if the ratio drops to 5, payments are coming in more slowly. This could make it harder for Marks & Spencer to restock products or cover daily expenses. To fix this, they might tighten payment terms or follow up more often with late-paying customers to speed up collections.

All in all, tracking this metric means that your business can make informed decisions to keep its finances stable and cash flow healthy. Using advanced tools and automation software can be a smart choice as it cuts time and reduces the chances of human error.

How to calculate accounts receivable turnover?

The accounts receivable turnover ratio shows how quickly a business collects payments from credit sales within a certain period. It helps businesses predict cash flow from unpaid invoices. If the time it takes for customers to pay starts changing, it signals that the payment terms need to be adjusted or there’s an issue that needs attention.

This calculation indicates how often your business collects payments from customers within a year. Here’s a quick breakdown of the components involved in this formula:

• Net Credit Sales: This is the total income a company earns from sales made on credit, meaning customers pay later instead of upfront. It does not include cash sales since those are paid immediately. Net credit sales also account for any discounts or returns, so it’s calculated by subtracting these from the total credit sales.
• Average Accounts Receivable: The denominator of this formula is the average accounts receivable balance. It’s usually found by taking the starting and ending receivable balances and calculating their average.

Similar to the calculation of net credit sales, the average accounts receivable formula should cover a particular timeframe.

Accounts receivable turnover formula

The accounts receivable turnover ratio formula is as follows:

AR Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Check out this fictional example where I’ve used the formula to clarify how it works:

Suppose Tesco, a leading UK supermarket, has:

• Net Credit Sales = £500,000
• Beginning Accounts Receivable = £40,000
• Ending Accounts Receivable = £60,000

First, calculate the average AR:

40000 + 60000 / 2 = 50 000

Then, apply the formula:

500000 / 50 000 = 10

This means Tesco collects its receivables 10 times per year. The number indicates a strong payment collection system. Remember, a higher ratio suggests efficient collections, while a lower ratio may mean delays in receiving payments.

Common errors and challenges when calculating accounts receivable turnover

Identifying the loopholes in the system is the first step to streamline the accounts receivable management process. Below, I’ve listed 4 challenges financial teams may encounter when handling the AR:

Sluggish Payment Cycles

Timely payments are essential for the business to stay relevant. AR teams must strive to shrink the gap between invoicing and collection. Slow payment cycles happen because:

• Handling paper or PDF invoices and checks requires significant time and effort, reducing team productivity.
• Some payments can take over a week to process—assuming customers pay on time.
• Long wait times make it harder for businesses to manage budgets and stay on top of invoices.

Finding the root cause of payment gaps can help you to take charge of the payment cycles.

Limited Scalability of AR Solutions

Many AR systems can’t keep up with growing businesses. This may create inefficiencies, data issues, and more errors. Without scalable solutions, companies struggle to manage increasing demands, slowing down growth and daily operations.

Above-Average DSO

DSO is the time it takes for credit sales to convert into cash. A high DSO reflects that current customers are taking too long to pay. If your business has a higher than the average industry DSO, it’s important to:

• Offer credit terms that your business can afford.
• Review and adjust financial planning to improve cash flow.
• Implement new policies to speed up collections.

Data shows that UK businesses reported their customers paying invoices 30 days after receiving them (31%). The next most common payment time was within 7 days of the invoice date (13%)⁴. When delays extend for longer, they could strain your customer relationships too.

Ineffective Reporting and Analysis

Many businesses still use outdated, manual reporting methods, which can lead to costly mistakes. Without real-time insights, companies struggle to make timely decisions, often missing chances to improve finances and plan effectively for the future. Knowing how to calculate accounts receivable turnover using modern solutions can help get better at reporting and evaluation.

At the end of the day, you should understand that not every customer out there is worth the credit risk. If you find any red flags in their financial history or had a troublesome encounter in the past, you should be careful when lending them credit. Research automation tools and platforms like Wise Business for international payments to maintain your financial health at its best.

High vs low accounts receivable turnover ratio

Knowing the primary difference between high and low accounts receivable ratios can help you position your business in either category. This can further help to determine whether your business needs better policies or they’re doing good enough.

A high accounts receivable turnover ratio means that the business has a good collection practice and gets its due payments on time. Conversely, a low turnover ratio shows that collections aren’t happening on time. Such businesses tend to face cash flow issues soon.

The table below outlines the key differences between high and low AR turnover ratios:

High AR Turnover Ratio	Low AR Turnover Ratio
Customers are reliable and pay on time.	Customers may have financial problems or lack of creditworthiness.
Strong cash flow allows further investments and credit expansion.	Cash flow issues can lead to potential delays in paying business expenses.
Conservative or strict—only creditworthy customers receive credit.	Liberal—credit is extended to a broader, riskier customer base.
Can support steady growth but may limit potential sales if too restrictive.	May initially attract customers but risks long-term financial instability.
Lower risk due to fewer bad debts and unpaid invoices.	Higher risk as there is a greater chance of unpaid invoices and late payments.
Viewed positively as it indicates financial stability and reliability.	May deter investors due to uncertainty in revenue collection.

On the surface, it may seem like businesses with high ratios are doing better than those with lower ratios. However, in some cases, a high turnover happens due to strict collection policies. You should closely monitor your current policies and devise ones that aren’t too rigid or too liberal. Striking a balance is important.

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FAQs about Accounts Receivable Turnover

Here are some of the most commonly asked questions about Accounts Receivable Turnover:

What is a good accounts receivable turnover?

A good accounts receivable (AR) turnover ratio is usually high, but it depends on the industry and business type. For most industries, a ratio between 5 and 10 is considered normal, but a higher number is generally better.

How to improve accounts receivable turnover?

To improve AR turnover:

• Send invoices promptly to avoid delays.
• Offer early payment discounts to speed up payments.
• State payment terms for clarity.
• Provide multiple payment options for convenience.
• Build strong customer relationships for reliability.
• Monitor aging reports to track overdue payments.
• Use automated invoicing to streamline collections.

Make it easy for customers to pay on time while managing outstanding debts effectively.

How can I determine the accounts receivable turnover of my business?

To find a business's accounts receivable (AR) turnover ratio, divide the total credit sales by the average amount of accounts receivable.

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Sources:

1. 27 Accounts Receivable Statistics for 2025
2. Research: The 2025 state of accounts receivable management challenges
3. The impact of late payments on businesses
4. Late payments research

Sources last checked on date: 12-May-2025