Online Calculators since 2009
Use the Accounts Receivables Turnover Ratio Calculator to calculate the the quality of receivables and credit sales, the higher the Turnover Ratio, the better the collection frequency of credit sales. Accounts Receivables Turnover Ratio is an important factor when securing a business loan.
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Accounts receivable is the money owed by the customers to the firm, the remaining amounts are paid without any interest.
Given the principle of time value of money, low turnover rates means the business loses more money.
If you are running a business no matter the size, micro, small medium or large, and you want to maximize your profits, you need to offer credit sales to your customers. A Challenge that arises when providing credit sales however is that you can block your money for a certain period of time, which makes it crucial to have a good accounting approach towards collecting the receivables from clients to actually materialize the profits.
The accounts receivable turnover ratio helps you quantify the effectiveness of your company's ability to collect its credits that are owed by its clients, it shows how effectively a company has been collecting the receivables it extends to its customers.
An online calculator helps you go through the calculations swiftly. It requires only 2 data fields to be filled accurately to give you the correct ratio.
Account receivable turnover ratio can be calculated for any period of time, it can be a year, a quarter or a month, for example, if you want to calculate annual ratio you need to input yearly net sales that are done on credit.
Accounts receivable turnover ratio majorly depends on average account receivables of any company, though generally high and low account receivables mean high and low quantity of effectiveness of credit collection of a company yet it can also impact differently. Let's understand how:
A high accounts receivable turnover ratio can indicate the high efficiency in debt collecting, quality customers and conservative credit policy, and sometimes it also means that the company majorly operates on a cash basis.
However, if the company is using a really tight credit policy it might start losing its client base, which means they should reconsider their policies even if it means a slight decrease in accounts receivable turnover ratio.
A low accounts receivable turnover ratio could show low effectiveness on collection of receivables due to bad credit policy and poor clientele. This could be resolved by taking immediate actions on improving the credit policies of the company. It can result in growth as there will be enough cash flow available with the collection of long due payments.
If you are an investor considering investing in a company, you should check its account receivable turnover ratio and look for a high ratio. In fact, ratios play an important part in several areas of investment. Generally, a high ratio will be an indicator that the company has a good credit policy and good customer base, which means a high probability that your investments will be safe and hopefully start growing.
Investors can also use the iCalculator's ARTR (Account Receivable Turnover Ratio) calculator to compare the account receivable turnover ratio of a company for past and present years; this could be a better way to see how the company has been growing over the years.
Investors can also use it to compare the ratio of different companies in the market because generally companies from the same industry operates in a similar way and should have similar accounts receivable turnover ratio. This investment comparison approach is not recommended for the comparison of companies operating in different industries.
There can also be some limitations for investors when it comes to calculating the ratio as certain industries have a seasonal effect on their operations with peak and troughs in turnover as there demand fluctuates. This fluctuation can distort the ratio if a non-annualized net turnover is used for comparison. An additional consideration is the use of baseline figures for the ratio calculation. Some companies use total sales instead of net sales, the result is an inflated ratio calculation. Companies may do this accidentally or for a specific reason, it is not necessarily a deliberate attempt to mislead investors. Regardless of the why Investors must remain vigilant and understand how a ratio is calculated before making decisions on whether to invest or not.
When you use a calculator to measure the Account Receivable Turnover Ratio, you will have a clear picture of how effectively and how many times in a year (or whichever period you want to consider) you are making the collections of your receivables. It will benefit you in different ways as mentioned below:
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