The Average Receivables Turnover Ratio is a core business metric used to measure the efficiency of a company in collecting its receivables or money owed to them by their customers. It filters out the effects of fluctuations in sales from month-to-month or year-to-year to provide a more accurate picture of the company’s collection practices. To calculate the Average Receivables Turnover Ratio, you divide the total net credit sales of the period by the average amount of accounts receivable during the same period. It is generally expressed as a number of times, such as 5.0x.
A higher Average Receivables Turnover Ratio indicates that a company is collecting its receivables more quickly and efficiently. This could mean that the company has better credit management; or, it could mean that the company is offering incentives to customers to pay their bills quickly.