The efficiency ratio or activity ratio that measures the number of times a business

can convert its accounts receivable into cash throughout a period is accounts receivable
turnover. As it were, the accounts receivable turnover ratio measures how many often a
business can gather its average accounts receivable amid the year. Each time a
business accumulates its average receivables is referred to as a turn. For example,
when a business had $40,000 of average receivables during the year and collected
$80,000 of receivables during the year, the business would have turned its accounts
receivable two times because it collected twice the amount of average receivables. The
accounts receivable turnover ratio shows how efficient a business is at collecting its
credit sales from customers. Few businesses collect their receivables from customers in
90 days while others take up to 6 months to collect from customers. In some ways the
receivables turnover ratio can be seen as a liquidity ratio also. Businesses are said to
be more liquid when they can convert their receivables into cash faster. Accounts
Receivable Turnover Ratio is equal to Net Credit Sales over Average Accounts
Receivable. Cash sales don't generate receivable, thats why net credit sales are used
instead of net sales. Only credit sales create a receivable, thus cash sales are removed
out of the calculation. Net sales is computed as sales minus returns and refunded sales.
The net credit sales can usually be found on the business income statement for the
year although not all companies report cash and credit sales separately. The beginning
receivables added to the ending receivables for the year and dividing by two is the
average receivables. It could be said, this is a rough estimation of the average
receivables for the year.