Understanding Accounts Receivable Turnover
Accounts receivable turnover is the ratio of accounts receivable for a term against the net credit sales for said term. When you make a sale on credit but struggle to collect on debts owed, that constricts cash flow and makes business operations much more difficult.
Healthy businesses, on the other hand, find solutions to improve accounts receivable efficiency and have an accounts receivable turnover ratio closer to 1:1. Achieving a desirable accounts receivable turnover ratio can help you get the most out of your accounts receivable process. In addition, being aware of how well your credit system is ultimately benefiting your business can enable you to make better decisions down the road.
Using an accounts receivable formula, you can measure accounts receivable turnover and determine whether or not you are making a profit.
This number can be found by dividing your credit sales during a certain time period by the average accounts receivable during that same period of time.
For example, if your net credit sales are $25 million and your average accounts receivable is $5 million, your accounts receivable turnover ratio would be five. In other words, your business was able to collect its receivables five times, or 5:1. To accurately determine this ratio, it’s important to be aware of your accounts receivable days on hand.
Accounts Receivable Turnover Formula
As discussed previously, the accounts receivable turnover formula involves dividing net credit sales by average accounts receivable over a specific timeframe. With this accounts receivable turnover ratio formula, you can assess your accounts receivable and see how well you’re performing. While the receivables turnover ratio may not tell you everything you should know about the state of your accounts receivables, it can give you a helpful overview of your cash flow. In that respect, the account receivable turnover formula can be a valuable tool.
Net Credit Sales / Average Accounts Receivable = Accounts Receivable Turnover
Speeding up time-to-cash is crucial. Getting paid faster can decrease the effort spent on tracking down payments, and it can improve how much cash you have on hand for regular business operations. Thankfully, with Paystand, companies can make fast, simple B2B payments, making transaction fees a thing of the past. You can digitize your receivables and move your manual financial processes to the cloud, speeding up time-to-cash, decreasing DSO by 60% or more, reducing fraud and chargebacks with real-time fund verification, and improving customer experience with seamless, easy B2B payment options.
Our B2B payments-as-a-service model transforms revenue operations so that you can put your teams to work on projects that matter, access cash and working capital faster, and grow with confidence.
Accounts Receivable Turnover Calculator
The main benefit of calculating accounts receivable turnover and keeping track of it as a metric is knowing how efficiently a company collects bill payments after sales are completed. This is why it’s important to use an accounts receivable turnover calculator (also known as an accounts receivable turnover ratio calculator).
Lending credit is useless if you aren’t seeing a return on your investment. A receivables turnover ratio calculator can help you get a big picture of your collected payments.
Paystand makes it possible for users to save over 50% on the cost of receivables and offers zero-fee payment options to our customers. With Paystand, you can also move to flat-rate plans that reduce your costs and increase margins. Instead of siloing your transaction data, you can integrate your B2B payments with your critical business tools, including ERP, eCommerce, CRM, and accounting systems.
Invoicing? No problem. You can send invoices with embedded payment links and use smart data to attach key invoice information to every payment. In addition, Paystand allows you to auto-reconcile transactions directly in your system of record. Users can essentially streamline their entire financial process with end-to-end payment functionality all in one place.
What Is A Good Accounts Receivable Turnover Ratio?
So, what is a good accounts receivable turnover ratio? Higher ratios are better, as they indicate an efficient accounts receivable process—your customers pay their bills on time, and your company collects debts effectively. Likewise, understanding the debtors' turnover ratio formula and interpretation can help you get a sense of your receivables and how well they’re paying off. Finally, by tracking your number of accounts receivable turnover days, you can work to make better policy changes down the road.
Further, your accounts receivable turnover ratio can be improved with an automated payments system. Paystand offers solutions to help users automate their accounts receivables, allowing them to get paid faster, increase ROI, and maximize efficiency by speeding up time-to-cash. With Paystand, you get flexible payment options, including the ability to accept cards, e-checks, and ACH transfers from bank accounts.
You can also schedule recurring payments from new and existing payers for subscriptions, contract terms, free trials, and more. Paystand helps you keep your payment data safe with unchangeable, blockchain-based audit trails. Our billing portals and payment experience are fully customizable and brandable to match your unique needs. All payments are stored in your ledger, with roll-ups of all transactions viewable and downloadable throughout their life cycle. Your developers get access to Paystand’s full suite of OAuth secured, RESTful APIs for whatever solution you may need.
Accounts Receivable Days
Accounts receivable days are the number of days an average invoice will remain outstanding before it is paid. The longer an invoice remains unpaid, the more constricted your cash flow becomes and the harder it is for your business operations to function properly. Accounts receivable days are sometimes referred to as trade receivable days.
Ideally, your receivable days ratio should reflect a successful cash flow in which you are being paid according to a swift, efficient timeline. You might also use a days sales in receivables formula or accounts receivable days formula to better understand your outstanding invoices. It can be helpful to determine which customers are paying their bills in a timely fashion and which are slower to respond. This can give you an idea of who you should do business with down the road and who you may want to cut ties with.
Days Sales Outstanding
Days sales outstanding is a measurement of the average number of days it takes a company to collect payments for a sale. It can be calculated using a DSO formula and refers to the same thing as accounts receivable days. This number can improve with digital accounts receivable solutions, so even if you aren’t currently meeting your targets, you can look for ways to accomplish those goals with a better solution.
Paystand enables users to make collections a revenue engine, driving more efficiency with automated invoicing and collections across their AR organization. You can streamline your cash cycle with integrated payments and collections. Paystand allows for zero-fee payments with the new Zero Card, sends reminders, and automates invoice communications. You can also reduce payment friction by providing an easier, friendlier customer experience for invoice collection.
By putting your team to work on more strategic projects with automated collections, you can improve AR efficiency. Paystand makes it possible for users to use payment history to build smart workflows to help them get paid faster, making us an excellent option for companies looking to gain deeper insight into their accounts receivable process and optimize their workflows.
Average Accounts Receivable Formula
Average accounts receivable is the average amount in your accounts receivable account on a given day. If you are struggling to collect payments quickly and efficiently, then this number will rise. Conversely, improving the efficiency of payment collection decreases the average accounts receivable and improves cash flow. To get a sense of how you’re performing in this area, you can use an average accounts receivable formula to get an average accounts receivable turnover ratio. Of course, your average payment period may differ from that of other businesses, so it’s important to keep that in mind when plugging numbers into formulas.
Paystand could make it more sustainable for users to manage their accounts receivable process. Your teams shouldn’t be spending time on manual, tedious tasks—thankfully, with Paystand, you can eliminate the manual overhead of payment collection, making the process more efficient and automated. For example, you can use scheduled payments to set up monthly, annual, or even custom schedules and enable autopay for customers with authorized funds on file. Users can also set up recurring payments for customers with standard payment terms.
With Paystand’s automated reconciliation, payments are immediately applied against invoices with no human intervention. You can apply payments automatically to invoices with immediate reconciliation and settle and record transactions directly in your ERP system.