Accounts Receivable Turnover Ratio

Definition

The accounts receivable turnover ratio, or ARTR, measures how effectively a company collects payments from customers who buy on credit. It calculates the number of times, within a specific period (usually a year), that a company can turn its average accounts receivable into cash. 

The ARTR formula: 

ARTR = Net credit sales / Average AR balance

Example: If a company has $1,000,000 in net credit sales and $200,000 as the average accounts receivable, the ARTR would be 5, indicating that the company collects its receivables five times annually.

Why it matters

This ratio provides insights into a company’s collection practices' efficiency and overall liquidity. A high turnover ratio suggests that the company quickly collects outstanding invoices, which means strong cash flow and effective credit policies. On the other hand, a low turnover ratio can point out some possible issues, such as lenient credit terms, inefficient collection processes, or dealing with financially unstable customers​.