Mastering Accounts Receivable: How to Get Paid Faster
Accounts Receivable (AR) Turnover measures how many times per year your business collects its average accounts receivable. A higher turnover means you collect cash faster, improving liquidity. The formula is: Net Credit Sales ÷ Average Accounts Receivable. The reciprocal (365 / turnover) gives the average collection period in days. Use this calculator to assess your collection efficiency.
FAQ
Q1: What is a good accounts receivable turnover ratio?
A ratio of 5-10 is typical for many industries (corresponding to 36-73 days collection period). Higher is better (faster collection). However, too high may indicate overly strict credit terms that could alienate customers. Compare to industry averages. For B2B, 5-7x is common; for retail, turnover can be much higher due to immediate payment.
Q2: How can I improve my AR turnover?
Invoice promptly: Send invoices immediately after delivery. Clear payment terms: State due dates, late fees, and payment methods. Offer discounts: Early payment discounts (e.g., 2% 10 net 30). Automate reminders: Use accounting software to send payment reminders. Check creditworthiness: Vet new customers before extending credit. Accept multiple payment methods: Make it easy to pay.
Q3: What's the difference between AR turnover and Days Sales Outstanding (DSO)?
They measure the same thing differently. AR Turnover = times collected per year. DSO = average days to collect. DSO = 365 ÷ AR Turnover. Lower DSO is better. For example, turnover of 12x = DSO of 30 days. Both metrics help gauge collection efficiency. Track trends over time.
Important: Use net credit sales (total sales minus returns/allowances), not total revenue if you have significant cash sales. Also ensure you're using the correct period for averages (e.g., if you have seasonal spikes, monthly averages may be more accurate than annual).