A higher ratio means invoices turn into cash faster. You will also see it called the receivables turnover ratio, or the debtors turnover ratio in the UK. It is the mirror image of days sales outstanding (DSO), which expresses the same relationship in days.
Receivables turnover ratio formula
Accounts receivable turnover = net credit sales ÷ average accounts receivable
| Input | What to use |
|---|---|
| Net credit sales | Sales on credit for the period, minus returns, allowances and discounts |
| Average accounts receivable | Opening plus closing trade receivables, divided by 2, or the average of month-end balances |
| Period | Usually a year, so the result reads as times per year |
Use trade receivables only. Loans to staff, tax refunds and other balances that did not come from sales do not belong in the ratio.
Accounts receivable turnover with a worked example
Example. A distributor sells to business customers on 30-day terms. Last fiscal year it invoiced $14,900,000 on credit and issued $300,000 of credit memos for returns, so net credit sales were $14,600,000. Receivables were $1,700,000 at the start of the year and $1,900,000 at the end. All figures are illustrative.
- Average receivables are ($1,700,000 + $1,900,000) ÷ 2 = $1,800,000.
- Turnover is $14,600,000 ÷ $1,800,000 = 8.11 times.
- In days, 365 ÷ 8.11 = 45 days.
The distributor collects its average balance about eight times a year, or once every 45 days. Dividing the days in the period by the turnover ratio gives DSO on the average receivables basis, so the two measures agree whenever they use the same figures.
What a high or low ratio means
A high ratio means customers pay soon after invoicing. If every customer paid exactly on 30-day terms, the ratio would be about 365 ÷ 30 = 12.2. A very high ratio can also mean your credit terms or limits are tighter than customers expect, which may cost you sales.
A low ratio means cash stays in receivables for longer. Common causes are late payers, disputed or incorrect invoices, slow follow-up and lenient credit decisions. Long agreed terms lower it as well, so a low ratio is not always a collections problem. An accounts receivable aging report shows whether the balance is overdue or simply not yet due.
Why receivables turnover differs by industry
The ratio depends on how an industry sells and bills. Retailers paid by card at checkout hold few receivables, so their ratio runs high. Wholesalers and manufacturers that sell on terms of 30 to 60 days sit lower, and construction firms often wait longer still because contracts can hold back retainage until the work is accepted.
Compare your ratio with your own history and with businesses that sell on similar terms. For US figures, the Census Bureau's Quarterly Financial Report publishes aggregated sales and trade receivables for corporations in manufacturing, mining, wholesale and retail trade and selected services, so you can work out a rough industry ratio yourself. Annual reports of publicly traded competitors on SEC EDGAR give the same two figures.
Common mistakes with the receivables turnover ratio
- Using total sales. The distributor also sells $1,400,000 a year for cash over the counter. Total sales of $16,000,000 give $16,000,000 ÷ $1,800,000 = 8.9 times, or about 41 days, which looks four days better than the true 45.
- Using the year-end balance only. $14,600,000 ÷ $1,900,000 = 7.7 times, or 47.5 days. In a seasonal business the error is larger, so average the month-end balances if you can.
- Mixing tax bases. Receivables that include VAT or sales tax, set against sales that exclude it, understate the ratio. The debtor days entry shows how to strip VAT out.
- Switching definitions. Use receivables either net or gross of the allowance for credit losses, and keep the same choice every period.
- Mixing periods. Quarterly sales divided by average receivables give a quarterly ratio. Multiply it by four before you compare it with an annual figure.
Sunbay connects to your ERP or accounting system and keeps the status of every invoice current. It matches incoming payments using ERP data, keeps each customer reply and promise to pay next to the invoice and sends reminders by email and SMS. Its view of every invoice and payment separates overdue balances from ones that are not yet due, the split a turnover ratio cannot show.
Frequently asked questions
How do you calculate the accounts receivable turnover ratio?
Divide net credit sales for the period by average accounts receivable. With net credit sales of $14,600,000 and average receivables of $1,800,000, the ratio is 8.11.
What is a good receivables turnover ratio?
One close to what your payment terms imply. Divide 365 by your standard terms in days, for example 365 ÷ 30 = 12.2 for 30-day terms, and compare your actual ratio with that figure.
How do you convert receivables turnover into days?
Divide 365 by the ratio. A turnover of 8.11 equals 45 days, the average collection period, which is the same as DSO.
Can the ratio be too high?
Yes. A very high ratio can mean credit terms or limits are so strict that some customers buy elsewhere. Check it against sales growth and the number of customers you turn down for credit.
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