Accounts Receivable Turnover
The next efficiency ratio is the Accounts Receivable Turnover. This ratio is similar the inventory turnover ratio, except now we use accounts receivable in place of inventory.
To calculate this ratio ideally would require access to a firm's internal credit policy, that is, you would need to know the level of 'credit sales' in the period to use as an input. So unless you know the business’ credit policy and proportion of credit to cash sales, then you will be unable to calculate the accounts receivable turnover with perfect precision.
However, we can use a workaround and have a pretty good approximation if we don't have access to the just mentioned internal data. We can use 'sales revenue' in place of 'credit sales' inside our formula. This means the calculation wouldn't be 100% accurate, but if you use trend analysis & comparisons all using the same formula you should still get some pretty good insight into the company's ratio performance.
And when getting access to the internal data of S&P500 firms is pretty difficult, we have used the 'sales revenue' approximation within RatioAnalysis.net.
So, if you do have access to the required info or use the approximation (sales revenue), this ratio tells you how times over you turned your accounts receivable balance into cash. How many times you built up an accounts receivable balance, collected the cash & repeated this process.
The benefit from knowing the result of this ratio is that it can assist with cash flow planning and assess the level of success within the collections department. While knowing how many times an AR balanced turned over isn’t that useful in isolation, the result can be used as a good benchmark for measurement over time. Further, as it removes scale from the business the benchmark can be used within an organization that is changing in size.
A calculation of 5.8 (for example) means the business turned their accounts receivable balance into cash 5.8 times over the period.
Accounts Receivable Turnover Formula
Sales Revenue / ((Accounts Receivable at Start of Period + Accounts Receivable at End of Period) / 2)
Accounts Receivable Turnover Calculator
The calculator asks for:
Sales Revenue, which is found in the income statement.
Accounts Receivable at the Start of Period, which is found on the previous balance sheet.
Accounts Receivable at the End of Period, which is found on the current balance sheet.
Want to know more about the Ratios used in the S&P500 stock calculations, including all formulas?
Check out their individual ratio pages via the main menu for Descriptions, Calculators & Formulas
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