![]() Recall that the formula is: Accounts Receivable Turnover Step 4: Complete the Accounts Receivable Turnover FormulaĪt this point, you have all the numbers you need to perform the calculation. They totaled $5,000 at the beginning of the year and $7,000 at the end of the year. This might be worth doing if your beginning and ending numbers are not representative of typical values for whatever reason.įor example, suppose you want to find your average accounts receivable for the year. Average Accounts ReceivableĪlternatively, you could figure out a daily average for the entire period. The beginning accounts receivable is the total accounts receivable balance on the first day of the period and the ending accounts receivable is the total ending balance on the last day of the period. ![]() The simplest way to calculate the average accounts receivable for a specified period is to take the sum of beginning accounts receivable and ending accounts receivable and divide them by two. In other words, it can be thought of as the total outstanding debt owed to you by your customers. First, note that your company's accounts receivable are the total unpaid money due to the company from sales that have been made. This next step will help you calculate your average accounts receivable. Step 3: Calculate Your Average Accounts Receivable For example, if your total sales for the year were $120,000 but $70,000 was from cash sales or other noncredit transactions, and $5,000 worth of credit sales was returned, your net credit sales for the quarter would be $120,000 - $70,000 - $5,000 = $45,000. Compute your total sales then subtract noncredit transactions (e.g., cash sales) and any returns or cancellations. To find your net credit sales, review your financial statements for the specified period. This doesn't mean credit card sales, but any sales made for which you didn't receive immediate customer payment and have payment due later (usually within seven to 30 days or so, depending on your company's credit terms ). A credit sale is any sale that was made on credit. The net credit sales are a key input into the formula. If you wanted to compute annually, you would use data from the entire year. 1 through March 31 for the first quarter, from April 1 through June 30 for the second quarter, and so on. It's important to establish what the period is and what the beginning and ending days are so you can find the right numbers and your calculation can give you accurate results.įor example, suppose you would like to track accounts receivable on a quarterly basis. You may choose to calculate it on an annual, quarterly, or monthly basis, or over any number of days. You must first define the period of time over which you will perform your ratio analysis. To help you out, we've broken this calculation down into steps and included examples. ![]() Here, we break down the calculation process so you can get started right away.Ĭalculating the accounts receivable turnover ratio formula requires taking the net credit sales over a period and dividing that figure by the average accounts receivable figure over that same period: Accounts Receivable Turnover The first step toward understanding accounts receivable turnover (AR turnover) is to understand how to calculate it. How Do You Calculate Accounts Receivable Turnover? In this article, we cover what it is, how to calculate it, why it's important, and how it can inform business decisions. Products like Skynova's accounting software can go a long way in helping streamline the process.Īccounts receivable turnover is one of many metrics and financial ratios that can be calculated from your business's financial data. Not only does it facilitate accurate accounting, but it can also provide you with the data you need to track your business's financial health. If you're a small business owner, you probably already know that proper bookkeeping is critical for keeping your business on track.
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