What is Accounts Receivable Turnover Ratio?
Nexa Consultancy | Startup & Finance Glossary
The Accounts Receivable Turnover Ratio is an efficiency ratio that measures how effectively a company is collecting payments from its customers. A higher ratio indicates that the company is collecting its receivables quickly, which translates to better cash flow. It shows how many times a company turns its receivables into cash during a period.
For Startups: For B2B startups that sell to large enterprises, this metric is crucial. A low ratio might signal that the company's credit policies are too lenient or its collection process is inefficient, leading to cash being tied up in receivables. Improving this ratio can significantly shorten the cash conversion cycle and improve liquidity.
Calculation: Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable.
Example: A company with net credit sales of ₹2 Crore and average accounts receivable of ₹20 Lakhs has a turnover ratio of 10. This means it collects its average receivables 10 times a year.