1. What is AR Turnover Ratio?

The Accounts Receivable (AR) Turnover Ratio measures how efficiently a company collects credit sales from customers. It shows how many times a company collects its average accounts receivable balance during a period.

2. How Does the Calculator Work?

The calculator uses the AR Turnover formula:

Where:

• Net Credit Sales — Total credit sales minus returns and allowances
• Average Accounts Receivable — (Beginning AR + Ending AR) / 2 for the period

Explanation: A higher ratio indicates more efficient collection of receivables, while a lower ratio may suggest collection problems.

3. Importance of AR Turnover Ratio

Details: This ratio is crucial for assessing a company's credit policies, collection efficiency, and liquidity. It helps identify potential cash flow problems and evaluate the effectiveness of the accounts receivable management.

4. Using the Calculator

Tips: Enter net credit sales and average accounts receivable in dollars. Both values must be positive numbers. The result is a unitless ratio.

5. Frequently Asked Questions (FAQ)

Q1: What is a good AR turnover ratio?
A: It varies by industry, but generally a higher ratio is better. A ratio of 10-12 is typical for many businesses, meaning receivables are collected about once a month.

Q2: How does AR turnover relate to collection period?
A: The collection period (days sales outstanding) can be calculated as 365 divided by the AR turnover ratio.

Q3: Should I use total sales or credit sales?
A: Only credit sales should be used, as cash sales don't create accounts receivable.

Q4: Why use average accounts receivable?
A: Using average balances accounts for seasonal fluctuations and provides a more accurate picture than using just the ending balance.

Q5: What causes a low AR turnover ratio?
A: Possible causes include poor collection processes, lenient credit policies, or customers experiencing financial difficulties.