Accounts Receivable Turnover Ratio Calculator

Accounts Receivable Turnover Ratio Formula

1. What is the Accounts Receivable Turnover Ratio Calculator?

Definition: This calculator computes the receivables turnover ratio ($ RTR $), which measures how efficiently a company collects payments from credit sales, and the average accounts receivable ($ AAR $).

Purpose: Helps businesses assess credit policies, cash flow management, and the effectiveness of accounts receivable collection processes.

2. How Does the Calculator Work?

The calculator follows a two-step process to compute $ RTR $:

Formulas:

$$ AAR = \frac{AR_{open} + AR_{close}}{2} $$

$$ RTR = \frac{NCS}{AAR} $$

Where:

$ RTR $: Receivables Turnover Ratio
$ AAR $: Average Accounts Receivable (dollars)
$ NCS $: Net Credit Sales (dollars)
$ AR_{open} $: Accounts Receivable (Opening) (dollars)
$ AR_{close} $: Accounts Receivable (Closing) (dollars)

Steps:

Step 1: Calculate $ AAR $. Average the opening and closing accounts receivable from the balance sheet.
Step 2: Determine $ NCS $. Input the net credit sales from the income statement.
Step 3: Calculate $ RTR $. Divide $ NCS $ by $ AAR $.

3. Importance of Receivables Turnover Ratio Calculation

Calculating $ RTR $ is crucial for:

Cash Flow Management: A higher $ RTR $ indicates faster collection of receivables, improving liquidity.
Credit Policy Evaluation: Assesses the effectiveness of credit terms offered to customers.
Financial Health: Helps identify potential issues with overdue payments or credit risk.

4. Using the Calculator

Example 1 (Calculator Enterprises Incorporated): $ NCS = \$15,000 $, $ AR_{open} = \$2,000 $, $ AR_{close} = \$3,000 $:

Step 1: $ AAR = (2,000 + 3,000) / 2 = \$2,500 $.
Step 2: $ NCS = \$15,000 $.
Step 3: $ RTR = 15,000 / 2,500 = 6 $.
Results: $ AAR = \$2,500 $, $ RTR = 6 $.

A turnover ratio of 6 indicates the company collects receivables six times per period.

Example 2: $ NCS = \$50,000 $, $ AR_{open} = \$5,000 $, $ AR_{close} = \$7,000 $:

Step 1: $ AAR = (5,000 + 7,000) / 2 = \$6,000 $.
Step 2: $ NCS = \$50,000 $.
Step 3: $ RTR = 50,000 / 6,000 \approx 8.33 $.
Results: $ AAR = \$6,000 $, $ RTR = 8.33 $.

A turnover ratio of 8.33 suggests efficient receivable collection.

Example 3: $ NCS = \$20,000 $, $ AR_{open} = \$4,000 $, $ AR_{close} = \$6,000 $:

Step 1: $ AAR = (4,000 + 6,000) / 2 = \$5,000 $.
Step 2: $ NCS = \$20,000 $.
Step 3: $ RTR = 20,000 / 5,000 = 4 $.
Results: $ AAR = \$5,000 $, $ RTR = 4 $.

A turnover ratio of 4 indicates a slower collection rate, possibly due to extended credit terms.

5. Frequently Asked Questions (FAQ)

Q: What is the receivables turnover ratio?
A: The receivables turnover ratio ($ RTR $) measures how many times a company collects its average accounts receivable over a period.

Q: Why use average accounts receivable?
A: $ AAR $ smooths out fluctuations in receivables over the period, providing a more accurate turnover measure.

Q: What does a low RTR indicate?
A: A low $ RTR $ may suggest slow collection, potential credit issues, or generous payment terms.