How to calculate accounts receivable turnover ratio

Published Tuesday 16 September 2025

Table of contents

• What is the accounts receivable turnover ratio?
• The accounts receivable turnover ratio formula
• An example calculation of the accounts receivable turnover ratio
• What makes a good accounts receivable turnover ratio
• How to improve your accounts receivable turnover ratio
• Pros and cons of the accounts receivable turnover ratio
• Track your accounts receivable turnover ratio for better cash flow
• FAQs on the accounts receivable turnover ratio

Key takeaways

• The receivables turnover ratio measures how efficiently your business collects payments from customers and can help you assess your cash flow and credit policies.
• The formula to calculate the accounts receivable turnover ratio is AR turnover ratio = Net credit sales / Average accounts receivable.
• A high ratio means you collect payments efficiently. A lower ratio may show you need to improve your cash flow process.
• The accounts receivable turnover ratio may not be a useful metric for cash-heavy businesses like grocery stores, or for seasonal businesses or industries with long payment cycles.

What is the accounts receivable turnover ratio?

The accounts receivable turnover ratio shows how quickly your business collects customer payments. It compares your credit sales to the average amount customers owe you.

The ratio helps you:

• Track collection efficiency: See how quickly customers pay their bills
• Compare performance: Benchmark monthly or quarterly results
• Assess cash flow health: Identify potential payment issues early

The receivables turnover ratio is often used to compare the efficiencies of businesses from the same or similar industries.

The accounts receivable turnover ratio formula

The accounts receivable turnover ratio formula shows how many times you collect your average receivables during a period:

AR turnover ratio = Net credit sales ÷ Average accounts receivable

Net credit sales

Net credit sales means the money you earn from credit sales after you subtract returns and allowances.

Net credit sales = Gross credit sales - Sales returns - Sales allowances

Key points:

• Use consistent timeframes: Calculate monthly or quarterly for accurate comparisons
• Exclude cash sales: Only include sales made on credit terms
• Adjust for deductions: Remove returns, allowances, and discounts

Average accounts receivable

Average accounts receivable is the average of your starting and ending balances:

Average AR = (Beginning AR + Ending AR) ÷ 2

Industry factors that affect your average:

• Business size: Larger companies often have higher averages due to extended credit terms
• Industry type: Some sectors naturally have longer payment cycles
• Credit policies: More lenient terms increase your average receivables

Accounts receivable turnover ratio example

This example shows how to calculate your accounts receivable turnover ratio:

Sample business data:

• Net credit sales: $450,000
• Average accounts receivable: $40,000

Step 1: Apply the formula

AR turnover ratio = $450,000 ÷ $40,000 = 11.25

Step 2: Interpret the result

This business collected its receivables 11.25 times during the year.

Step 3: Calculate average collection period

365 days ÷ 11.25 = 32.4 days

What this means: Your customers pay every 32 days on average. If you offer 30-day terms, they pay about two days late.

What makes a good accounts receivable turnover ratio

A good accounts receivable turnover ratio is different for each industry. For example, construction companies with long projects have different ratios than retail stores with short credit terms.

A higher ratio usually means you collect payments efficiently and your credit policies work well. If your ratio is very high, your credit policies may be too strict. This could make it harder to attract new customers.

A lower ratio means you may want to review your collection process. It can show you have flexible credit terms or that you could improve how you collect payments.

Ways to improve your accounts receivable turnover ratio

To improve your collections efficiency, try these steps. They can help you get paid faster and keep your cash flow strong.

Here are a few ways to improve your ratio:

• Set clear payment terms and include them on all invoices and contracts
• Send invoices promptly and make sure they are accurate and easy to understand
• Offer a small discount for early payments to give customers an incentive to pay sooner
• Follow up on overdue invoices with polite and consistent reminders
• Use accounting software to automate invoicing and send payment reminders for you

Pros and cons of the accounts receivable turnover ratio

The accounts receivable turnover ratio gives you useful insights, but it has both strengths and limits.

The advantages

Key advantages include:

• Cash flow visibility: Track how quickly customers pay to predict incoming funds
• Early problem detection: Spot payment delays and collection issues before they impact operations
• Industry benchmarking: Compare your performance against sector standards
• Accurate forecasting: Use consistent ratios to predict future cash flow patterns
• Investor confidence: Demonstrate strong financial management to lenders and investors

The disadvantages

When the ratio isn't useful:

• Cash-heavy businesses: Grocery stores and retail shops with mostly cash transactions
• Seasonal operations: Businesses with dramatic sales fluctuations throughout the year
• Long payment cycles: Industries where extended payment terms are standard practice

Additional limitations:

• No customer-level insights: Can't identify which specific customers cause problems
• Ignores collection costs: Doesn't account for time and resources spent chasing payments
• Accounting manipulation: Results can be artificially improved by writing off bad debts
• Incomplete picture: Should be used alongside other financial metrics for full assessment

Track your accounts receivable turnover ratio for better cash flow

Tracking your accounts receivable turnover ratio helps you maintain healthy cash flow and make data-driven decisions about credit policies.

Regular monitoring provides:

• Better cash flow management: Predict and plan for incoming payments
• Improved credit decisions: Adjust payment terms based on collection performance
• Business growth support: Use strong ratios to secure funding and partnerships

Xero accounting software automates ratio calculations and gives you real-time insights into your receivables. This makes it easier to track trends and spot issues early.

You can improve your collections and try Xero for free today.

FAQs on the accounts receivable turnover ratio

Here are some common questions about accounts receivable turnover ratio.

What does a high average accounts receivable turnover ratio mean?

A high accounts receivable turnover ratio usually means your customers pay on time. It also shows your credit collection process works well and you have fewer unpaid bills.

What does a low average accounts receivable turnover ratio mean?

A low average ratio may mean you could improve your credit collection process. It can also show your credit policies are flexible, and you may want to review your payment terms and credit checks.

What's considered a good accounts receivable turnover ratio for different industries?

There is no single 'good' ratio because each industry is different. For example, construction businesses with long payment cycles have lower ratios than retail businesses. Compare your ratio to your industry average and your past results to see how you are doing.

How can automated accounting software help improve my turnover ratio?

Xero accounting software automates key tasks to help you collect payments faster. You can set up recurring invoices, send automatic payment reminders, and offer online payment options. This saves you time and helps improve your cash flow.