What is Accounts Receivable Turnover?
The accounts receivable turnover ratio is an important financial ratio that measures how quickly and efficiently a company collects its receivables. This ratio measures how many times a business collects its average receivables, which in turn is a measure of financial stability, efficient cash flow management, and the ability to meet its own obligations as they become due.A higher turnover rate indicates a solid credit policy, a well-managed collections process, and high-quality customers who typically pay in full and on time. By contrast, a low turnover ratio indicates poor credit policy, inefficient collections processes, and customers who pay late â or may not even pay at all.Like any such generalizations, there are exceptions here as well. Sometimes, a tighter credit policy, although ensuring efficient collections and a strong cash flow, can keep away potential customers. During times of economic hardship or facing tough competition, a company may be willing to tolerate a lower ratio to increase sales.When analyzing accounts receivable turnover, it is important to compare ratios of companies within the same industry to ensure that the ratio of a business is on par for its specific industry.