How is Accounts Receivable Turnover calculated?

Accounts Receivable Turnover is calculated by dividing the credit sales by the average accounts receivable during a specific period. This ratio measures how effectively a company is managing its accounts receivable, providing insight into how quickly it collects payments from its customers. A higher turnover rate indicates that the company is efficient in collecting its receivables, which can positively impact cash flow and overall financial health.

The rationale behind using credit sales instead of total sales is to focus on the revenue that is expected to be collected, excluding any cash sales since they don't contribute to accounts receivable. By calculating this ratio, managers can assess the effectiveness of their credit policies and collection processes. It serves as an important metric for understanding liquidity and operational efficiency within the business.