Accounts Receivables Turnover Formula

Accounts Receivables Turnover Formula (Table of Contents)

• Accounts Receivables Turnover Ratio Formula
• Accounts Receivables Turnover Ratio Calculator
• Accounts Receivables Turnover Formula in Excel (with excel template)

Accounts Receivables Turnover Ratio Formula

The formula for calculating Accounts Receivables Turnover is as follows:

Where,

Net Credit sales:- are the revenue sales generated by a company by allowing the extension of credit to customers less all sales returns and sales allowances. It does not include any sales where the payment is made in cash immediately by the customers.

Average accounts receivable:- is the average balance of the accounts receivable during any specific period of time. Accounts receivable is a very important concept in business. It represents money owed by the customers to the company. The money owed is against the goods or services bought by the customers on credit.

Examples of Accounts Receivables Turnover Ratio Formula

Anand Foods is a retail store that sells grocery. Anand offers credit option to his customers. After the financial year closing, Anand’s was having $10,000 accounts receivable amount in his balance sheet.

The gross credit sales for the financial year was $40,000 and, and $15,000 was the sales returns. Anand’s last year’s balance sheet showed $15,000 of accounts receivable.

As we know the formula for Accounts Receivables Turnover Ratio is as follows:

Accounts Receivables Turnover Ratio Formula = Net Credit Sales / Average accounts receivable

In order to calculate Anand’s turnover ratio, we need to calculate Net Credit Sales and Average accounts receivable.

We can calculate Net Credit sales after adjusting sales return, i.e.,

• Net Credit Sales= Gross Credit sales – Sales Returns.
• Here, Net Credit sales = $40,000-$15000.
• = $25,000.

Anand Average accounts receivable can be calculated by taking an average of accounts receivable. i.e.,

• Average accounts receivables = (Opening Balance + Closing Balance)/2
• Here Average accounts receivable= ($10,000+$15000)/2
• = $12,500.

Now we can calculate Anand’s accounts receivable turnover ratio as follows:

Accounts Receivables Turnover Ratio Formula = Net Credit Sales / Average accounts receivable

Accounts Receivables Turnover Ratio Formula = $25,000/ $12,500. i.e =  2

This shows Anand’s turnover is 2.

It means Anand collects his receivables 2 times a year or once every 180 days. i.e., the estimated time Anand takes to collects the cash is 180 days in case of credit sales.

Explanation

Accounts Receivables Turnover Ratio Formula majorly constitutes two variables:

1. Net Credit sales – It is the revenue sales generated by a company by allowing the extension of credit to customers less all sales returns and sales allowances. It does not include any sales where the payment is made in cash immediately by the customers.

Net Credit Sales can be calculated as; Net Credit Sales = Gross Credit Sales – Sales Return / Sales Allowances

2. Average accounts receivable – It is the average balance of the accounts receivable during any specific period of time. Accounts receivable is a very important concept in business. It represents money owed by the customers to the company. The money owed is against the goods or services bought by the customers on credit.

We can calculate Average accounts receivable as; Average Accounts receivable = (Opening Balance + Closing Balance) / 2

Use of Accounts Receivables Turnover Ratio

Accounts Receivables Turnover ratio formula shows the ability of business to collect its receivables.

The higher ratio is more favourable to business. Higher turnover ratios mean that the company is collecting the receivable more regularly in any financial year. For example, if a company have Accounts Receivables Turnover Ratio of 4 that means that the company is collecting its accounts receivable 4 times during the year (the company have a 90 Days cycle).

Higher efficiency is favourable as provides good liquidity position to the company. Availability of cash for the working capital e.g., paying bills and other short-term liabilities.

Accounts turnover ratio can also be used as an indication of the quality of receivables and credit sales. If a company is having a higher ratio, it shows that credit sales are more frequently collected vis-a-vis the company with a lower ratio. Accounts receivable are often used as collateral for loans. Hence, we can say it is very important to maintain the quality of receivables.

Accounts receivable is the money owed by the customers to the firm, these remaining amounts are paid without any interest. As per the principle of time value of money, the firm loses more money if the turnover is low, i.e., Longer tenor to collect its credit sales.

Interpretation of Accounts Receivables Turnover Ratio

Accounts Receivables Turnover ratio formula can be categorised under the Efficient ratio as it shows How efficient is a business in collecting its receivables.

The higher ratio is more favourable to business. Higher turnover ratios mean that the company is collecting the receivable more regularly in any financial year. For example, if a company have Accounts Receivables Turnover Ratio of 4 that means that the company is collecting its accounts receivable 4 times during the year (the company have a 90 Days cycle).

On the other side, a company with low Accounts turnover ratio shows that the time interval between the receipt of money and credit sales and is high. There is always a risk of liquidity crunch for the working capital requirements.

Accounts Receivables Turnover Ratio may vary from business to business. If a company have huge requirement of working capital and liquidity, then they will have higher turnover ratios as a comparison to the companies with low working capital requirements.

Accounts Receivables Turnover Ratio Calculator

You can use the following Accounts Receivables Turnover Ratio Calculator.

Accounts Receivables Turnover Formula in Excel (with excel template)

Here we will do the same example of the accounts receivables turnover ratio formula in Excel. It is very easy and simple. You need to provide the two inputs of Net Credit Sales and Average Accounts Receivables.

You can easily calculate the accounts receivables turnover formula in the template provided.

In order to find out the accounts receivables turnover ratio, we need to find out the two things i.e Net Credit Sales and Average accounts receivables.

So first we need to calculate Net Credit Sales.

Net Credit Sales= Gross Credit sales – Sales Returns.

Then we need to calculate Average accounts receivables.

i.e Average accounts receivables = (Opening Balance + Closing Balance)/2.

Now, we can calculate

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