Accounts Receivable Turnover
Calculate how quickly you collect payments from customers.
Formula
AR Turnover Ratio = Net Credit Sales / Average Accounts Receivable Days Sales Outstanding (DSO) = 365 / AR Turnover Ratio Average AR = (Beginning AR + Ending AR) / 2
How to Calculate
Accounts receivable turnover measures how efficiently you collect payments from credit customers. Divide your total net credit sales (exclude cash sales) by your average accounts receivable balance. A higher ratio means faster collections; a lower ratio means money sits in receivables longer.
Convert the ratio to Days Sales Outstanding (DSO) by dividing 365 by the turnover ratio. DSO tells you the average number of days it takes to collect after a sale. If your payment terms are Net 30 but your DSO is 52, customers are paying an average of 22 days late.
Track this metric monthly and compare to your stated payment terms. A rising DSO is an early warning sign of collection problems, customer financial distress, or overly generous credit policies. Compare your DSO to industry benchmarks to see how your collections stack up against peers.
Worked Example
A B2B company with Net 30 payment terms:
Annual net credit sales: $960,000 Beginning AR: $72,000 Ending AR: $88,000
Average AR: ($72,000 + $88,000) / 2 = $80,000 AR Turnover: $960,000 / $80,000 = 12.0 times per year DSO: 365 / 12.0 = 30.4 days
This company collects almost exactly on terms—a sign of healthy receivables management. If DSO were 45 days, it would mean $120,000 tied up in overdue receivables ($960,000 / 365 × 15 extra days = ~$39,452 in excess AR).
Why It Matters
Accounts receivable represent cash you have earned but not yet collected. A high DSO ties up working capital, increases bad debt risk, and can create cash flow crises even for profitable businesses. Monitoring AR turnover helps you identify collection problems early, enforce payment terms, and make data-driven decisions about credit policies.
Practical Tips
- ✓Compare DSO to your payment terms—a DSO significantly higher than your terms indicates collection problems.
- ✓Automate invoice reminders at 1, 7, and 14 days past due to reduce DSO.
- ✓Offer early payment discounts (e.g., 2/10 Net 30) to incentivize faster payment on large invoices.
- ✓Review customer aging reports weekly to catch overdue accounts before they become write-offs.
Frequently Asked Questions
What is a good DSO for a business?
How do I reduce my DSO?
Should I use net credit sales or total sales in the formula?
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