What is Accounts Receivable Turnover Ratio (ART) and How is it Important in Accounting?

Posted In | Finance | Accounting Software

What is Accounts Receivable Turnover ratio (ART) in Accounting?

The accounts receivable turnover ratio (ART) is a financial ratio that measures a company's effectiveness in collecting its receivables. The turnover ratio is calculated by dividing the total value of a company's credit sales by the average value of its accounts receivable over a period of time.

 

 

How do you Calculate Average Days in Accounts Receivable?    

The most common method is to divide the number of days in a period by the number of invoices outstanding at the end of that period. Another method of calculating average days in accounts receivable is to take the total amount of receivables and divide it by the number of days in the period. Finally, you could also calculate average days in accounts receivable by dividing the total number of invoices by dividing it by the number of days in the period.

 

What type of ratio is a Receivables Turnover Ratio?    

A receivables turnover ratio is a financial ratio that measures a company's ability to turn its receivables into cash.

 

What is a Good Accounts Receivable Turnover Ratio?    

A good accounts receivable turnover ratio is 7.8. This means that, on average, a company will collect its accounts receivable 7.8 times per year. A higher number is better, since it means the company is collecting its receivables more quickly.

 

What is a Low AR Turnover?    

A low AR turnover indicates that a company's receivables are not being effectively managed and that the company is not collecting payments from its customers in a timely manner. This can be a sign of financial distress and may lead to the company defaulting on its obligations.

 

What is the Purpose of Accounts Receivable Turnover Ratio?    

The accounts receivable turnover ratio is a financial metric used to measure a company’s effectiveness in collecting its receivables or money owed by customers. The ratio calculates a company’s credit sales by its average accounts receivable. A high accounts receivable turnover ratio indicates that a company collects its receivables quickly and efficiently. A low ratio indicates that the company is not managing its receivables on time.

 

What are the Limitations of the Accounts Receivables Turnover Ratio?    

1. The accounts receivable turnover ratio does not take into account the timing of payments. 
2. The accounts receivable turnover ratio does not take into account the creditworthiness of the customers.  
3. The accounts receivable turnover ratio does not take into account the terms of the sales.

 

Tips for Improving your Accounts Receivable (AR) Turnover Ratio    

1. Review your credit policy and make sure it is tight enough to protect your business but not so tight that it is preventing you from making sales.
2. Make sure you are invoicing your customers promptly and accurately.
3. Follow up with customers who are late in paying their invoices.
4. Offer discounts for early payment.
5. Consider using a factoring company to finance your accounts receivable.
6. Stay on top of your collections by using accounting software that tracks receivables and provides reports on past-due invoices.