As part of a financial statement analysis, the account receivables turnover ratio is one of several utilization ratios that measure the efficiency with which a company uses certain assets to generate sales. It can also be used for preparing financial projections. Turnover refers to the number of times per time period a particular asset's balance is reduced to zero. This makes them useful tools for analyzing time frames associated with managing these assets.
Calculating Accounts Receivable Turnover
Calculate the accounts receivable turnover ratio by dividing the company's total sales by its accounts receivable balance. You can also calculate sales to average total accounts receivable by using in the denominator the average of beginning accounts receivable and ending accounts receivable. Using the average helps account for any significant changes in the balance of accounts receivable during the relevant time period. You can also calculate the average days that accounts receivable are outstanding by dividing the number of days in the year -- 360 days for financial purposes -- by the accounts receivable turnover ratio.
If a company has total sales of $1 million and accounts receivable of $200,000, the accounts receivable turnover equals $1 million divided by $200,000, or 5.0. This implies that accounts receivable are completely collected and return to their average balance five times per year. Dividing 360 days by 5.0 results in days receivables outstanding equal to 72 days. Turnover ratios are best compared against peer companies, such as competitors, and they should be analyzed for trends. If a company's accounts receivable turnover ratio consistently declines over a five-year period, this may indicate that the company is having difficulty in getting customers to pay.