{"id":13542,"date":"2025-05-13T08:21:41","date_gmt":"2025-05-13T12:21:41","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=13542"},"modified":"2025-05-28T06:37:18","modified_gmt":"2025-05-28T10:37:18","slug":"accounts-receivable-turnover-ratio-how-to-calculate-it","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/accounts-receivable-turnover-ratio-how-to-calculate-it\/","title":{"rendered":"Accounts receivable turnover ratio: Formula, definition, importance, and examples \u00a0"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-us\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tAccounts receivable turnover ratio: Formula, definition, importance, and examples \u00a0\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2025-05-13T08:21:41-04:00\">May 13, 2025<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"Accounts receivable turnover ratio: Formula, definition, importance, and examples \u00a0\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-us\/blog\/accounts-receivable-turnover-ratio-how-to-calculate-it\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-us\/blog\/author\/staceymcintosh\/\">\n\t\t\t\t<img decoding=\"async\" alt=\"\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2018\/11\/Stacey-McIntosh-350-1.jpg\" class=\"entry-author__image\" height=\"40\" width=\"40\" fetchpriority=\"high\" \/>\t\t\t\t<span class=\"entry-author__name\">Stacey McIntosh<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n<p>Unpaid invoices create problems for any small company, squeezing cash flow. <\/p>\n\n\n\n<p>So how can you prevent this situation and allow your business to breathe? <\/p>\n\n\n\n<p>The first step is to calculate your Accounts Receivable Turnover Ratio (ARTR), which can also boost the long-term financial health of your business.&nbsp;<\/p>\n\n\n\n<p>The accounts receivable turnover ratio measures how efficiently you are collecting payments (receivables) owed by your customers. <\/p>\n\n\n\n<p>Simply put, it shows how frequently you collect the average amount owed (<a href=\"https:\/\/www.sage.com\/en-us\/blog\/what-is-accounts-receivable\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>accounts receivable<\/strong><\/a>) during a specific period. <\/p>\n\n\n\n<p>This ratio helps you see how quickly your customers are paying their invoices.&nbsp;&nbsp;<\/p>\n\n\n\n<p>This article explains how ARTR works and how you can use this metric to best effect.&nbsp;<\/p>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#h-what-is-the-accounts-receivable-turnover-ratio\" data-level=\"2\">What is the accounts receivable turnover ratio?<\/a><\/li><li><a href=\"#h-why-ar-turnover-ratio-is-important-for-your-business-nbsp\" data-level=\"2\">Why AR turnover ratio is important for your business &nbsp;<\/a><\/li><li><a href=\"#h-how-to-calculate-accounts-receivable-turnover-ratio-nbsp\" data-level=\"2\">How to calculate accounts receivable turnover ratio &nbsp;<\/a><\/li><li><a href=\"#h-accounts-receivable-turnover-ratio-formula-nbsp\" data-level=\"2\">Accounts receivable turnover ratio formula &nbsp;<\/a><\/li><li><a href=\"#h-how-to-calculate-accounts-receivable-turnover-in-three-steps-nbsp\" data-level=\"2\">How to calculate accounts receivable turnover in three steps &nbsp;<\/a><\/li><li><a href=\"#h-accounts-receivable-turnover-example-nbsp\" data-level=\"2\">Accounts receivable turnover example &nbsp;<\/a><\/li><li><a href=\"#h-what-is-a-good-accounts-receivable-turnover-ratio-nbsp\" data-level=\"2\">What is a good accounts receivable turnover ratio? &nbsp;<\/a><\/li><li><a href=\"#h-typical-ar-turnover-ratio-benchmarks-nbsp\" data-level=\"2\">Typical AR turnover ratio benchmarks &nbsp;<\/a><\/li><li><a href=\"#h-how-to-improve-your-accounts-receivable-turnover-ratio-nbsp\" data-level=\"2\">How to improve your accounts receivable turnover ratio &nbsp;<\/a><\/li><li><a href=\"#h-final-thoughts-nbsp\" data-level=\"2\">Final thoughts &nbsp;<\/a><\/li><\/ul><\/div>\n\n\n\n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Small business survival toolkit<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get your free guide, business plan template, and cash flow forecast template to help you run your business and achieve your goals.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-aee5a8c2-281d-42bb-8da2-eda5b62f63c6\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download your free toolkit<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<div class=\"single-cta__downloads\">\n\t\t\t\t\t\n\t\t\t\t\t10,548 readers have downloaded this toolkit\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327127856-1440x810.jpg\" class=\"single-cta__image\" alt=\"Female hands working on a laptop\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327127856-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-the-accounts-receivable-turnover-ratio\"><strong>What is the accounts receivable turnover ratio?<\/strong><\/h2>\n\n\n\n<p>The accounts receivable turnover ratio compares net credit sales against your average accounts receivable status over a given period. <\/p>\n\n\n\n<p>This tells you how efficiently you&#8217;re converting receivables into revenue.&nbsp;<\/p>\n\n\n\n<p>Your incoming revenue dictates your cash flow and ultimately, your company\u2019s financial health.<\/p>\n\n\n\n<p>If you&#8217;re generating plenty of revenue and have spending under control, you should have the cash to cover costs, make accurate forecasts, strategize, and invest for growth. <\/p>\n\n\n\n<p>Therefore, tracking and improving the turnover directly impacts your cash flow. <\/p>\n\n\n\n<p>A healthy ratio allows for better financial planning and reduces the risk of cash flow shortages.&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<p>You can evaluate your accounts receivable turnover by benchmarking it against the average for your industry or niche.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-why-ar-turnover-ratio-is-important-for-your-business-nbsp\"><strong>Why AR turnover ratio is important for your business<\/strong>&nbsp;<\/h2>\n\n\n\n<p>There is no defined &#8220;highest&#8221; AR turnover ratio number. <\/p>\n\n\n\n<p>A higher number simply indicates that your credit policies are effective and customers are paying promptly, meaning you\u2019re collecting efficiently. <\/p>\n\n\n\n<p>However, a very high number could suggest overly strict credit terms, potentially deterring some customers.&nbsp;<\/p>\n\n\n\n<p>If your business can handle it, you may deliberately aim for a lower ratio so that other operating metrics become attuned to attracting customers with better credit terms. <\/p>\n\n\n\n<p>Conversely, a low ratio suggests clients are taking too long to pay. <\/p>\n\n\n\n<p>This could be because of poor management or credit policies, or a riskier customer base\u2014your credit policies may be too lenient, or too much of your customer base is simply slow to pay.&nbsp;<\/p>\n\n\n\n<p>While the AR turnover mainly reflects your positioning for cash flow, it indirectly affects other aspects of your operation. <\/p>\n\n\n\n<p>Chief among these are:&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Forecasting<\/h3>\n\n\n\n<p>The ARTR is an important assumption for balance sheet and cash flow forecasts, influencing the precision of your financial predictions.<\/p>\n\n\n\n<p>Incorporating this metric into financial models provides a more realistic view of future cash inflows, adding weight to your strategic planning.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Investor confidence<\/h3>\n\n\n\n<p>A high turnover ratio demonstrates the company&#8217;s ability to manage its receivables effectively and maintain liquidity.<\/p>\n\n\n\n<p>This naturally boosts investors\u2019 trust in your business.&nbsp;&nbsp;<\/p>\n\n\n\n<p>If you have a lower AR ratio than you want, there are ways to fix it. <\/p>\n\n\n\n<p>But first, you need to make the right calculations to understand your receivable ratios, including your AR turnover and average days-to-pay (also known as day ratio).&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-calculate-accounts-receivable-turnover-ratio-nbsp\"><strong>How to calculate accounts receivable turnover ratio<\/strong> <strong><\/strong>&nbsp;<\/h2>\n\n\n\n<p>Your credit sales don\u2019t exactly measure revenue because they haven\u2019t been paid yet.<\/p>\n\n\n\n<p>Likewise, your accounts receivable balance isn\u2019t the same as revenue\u2014it only represents the portion of credit sales that remains unpaid at any particular time.&nbsp;&nbsp;<\/p>\n\n\n\n<p>However, the relationship between these two figures does help you understand how quickly your business is converting sales into cash. <\/p>\n\n\n\n<p>Here\u2019s how it works on paper:&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-accounts-receivable-turnover-ratio-formula-nbsp\"><strong>Accounts receivable turnover ratio formula<\/strong> <strong><\/strong>&nbsp;<\/h2>\n\n\n\n<p><strong>ARTR = Net credit sales \/ Average accounts receivable<\/strong>&nbsp;<\/p>\n\n\n\n<p>Here, net credit sales refers to sales made on credit, minus any returns, discounts or allowances. <\/p>\n\n\n\n<p>It\u2019s a figure that accumulates over the period you\u2019re measuring.&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<p>Meanwhile, accounts receivable is a fluctuating balance, providing a snapshot at a specific moment. <\/p>\n\n\n\n<p>To make a meaningful comparison, you need an AR figure that represents the entire period rather than just one point in time. <\/p>\n\n\n\n<p>That\u2019s why you use the average accounts receivable\u2014the average of all recorded AR balances throughout the analysis period.&nbsp;<\/p>\n\n\n\n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Small business survival toolkit<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get your free guide, business plan template, and cash flow forecast template to help you run your business and achieve your goals.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-aee5a8c2-281d-42bb-8da2-eda5b62f63c6\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download your free toolkit<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<div class=\"single-cta__downloads\">\n\t\t\t\t\t\n\t\t\t\t\t10,548 readers have downloaded this toolkit\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327127856-1440x810.jpg\" class=\"single-cta__image\" alt=\"Female hands working on a laptop\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327127856-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-calculate-accounts-receivable-turnover-in-three-steps-nbsp\"><strong>How to calculate accounts receivable turnover in three steps<\/strong>&nbsp;<\/h2>\n\n\n\n<p>So the accounts receivable turnover formula is fairly simple, but you still need to fit it into your overall <a href=\"https:\/\/www.sage.com\/en-us\/blog\/accounts-receivable-management\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>accounts receivable process<\/strong><\/a>. <\/p>\n\n\n\n<p>Here\u2019s how:&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Gather the required data<\/h3>\n\n\n\n<p>For the period you\u2019re measuring, collect the net credit sales total and accounts receivable balances.<\/p>\n\n\n\n<p>These are available in your income statement and balance sheet.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Calculate the average accounts receivable<\/h3>\n\n\n\n<p>Add your beginning and ending accounts receivable balances and divide by two.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Run the formula<\/h3>\n\n\n\n<p>Divide your net credit sales by your average accounts receivable.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-accounts-receivable-turnover-example-nbsp\"><strong>Accounts receivable turnover example<\/strong>&nbsp;<\/h2>\n\n\n\n<p>Here\u2019s what the calculation could look like in practice:&nbsp;<\/p>\n\n\n\n<p>Let\u2019s say your company had $500,000 in net credit sales during the year. And your accounts receivable balance varied between $50,000 and $200,000 each month.&nbsp;&nbsp;<\/p>\n\n\n\n<p>The average over 12 months was $125,000. <\/p>\n\n\n\n<p>That implies that the sum of AR figures over the 12 months was much more than the $500,000 in sales\u2014but that\u2019s entirely plausible because some amounts could carry over from month to month.&nbsp;<\/p>\n\n\n\n<p>Accounts receivable turnover ratio is: $500,000 \/ $125,000 = 4&nbsp;<\/p>\n\n\n\n<p>This result means your company collected its average accounts receivable four times during the year.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-a-good-accounts-receivable-turnover-ratio-nbsp\"><strong>What is a good accounts receivable turnover ratio?<\/strong>&nbsp;<\/h2>\n\n\n\n<p>A &#8220;good&#8221; ARTR varies significantly by industry. For example, what&#8217;s &#8220;high&#8221; for a grocery store might be &#8220;low&#8221; for a construction company. <\/p>\n\n\n\n<p>Grocery stores deal with perishable goods, so they often expect rapid turnover due to frequent transactions.&nbsp;&nbsp;<\/p>\n\n\n\n<p>The only way to truly know your status is to compare your AR turnover to industry benchmarks, which are available through industry-specific financial reports or business associations. <\/p>\n\n\n\n<p>Aim for a ratio that aligns with or exceeds your industry&#8217;s average, signaling healthy <a href=\"https:\/\/www.sage.com\/en-ie\/blog\/what-is-cash-flow-management\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>cash flow management<\/strong><\/a>.&nbsp;<\/p>\n\n\n\n<p>However, a high turnover ratio generally indicates efficient collection, while a low ratio suggests slow-paying customers. Let\u2019s look at these aspects in more detail.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-high-ratio-nbsp\"><strong>High ratio<\/strong>&nbsp;<\/h3>\n\n\n\n<p>A very high ARTR indicates that your company is collecting receivables quickly, suggesting efficient credit and collection practices.&nbsp;<\/p>\n\n\n\n<p>However, extremely high ratios should be examined carefully. <\/p>\n\n\n\n<p>They might indicate overly restrictive credit policies that deter potential customers, limiting sales growth. <\/p>\n\n\n\n<p>While efficient, it\u2019s important to balance rapid collection with maintaining strong customer relationships and competitive credit terms.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-low-ratio-nbsp\"><strong>Low ratio<\/strong>&nbsp;<\/h3>\n\n\n\n<p>If your ratio is consistently low, this implies potential cash flow issues, and you may have valuable working capital tied up, which could hinder growth.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Investigate the root cause: are customers struggling financially, or is there a technical issue obstructing payments? Analyze customer payment patterns and credit policies.&nbsp;<\/p>\n\n\n\n<p>If necessary, tighten credit terms to encourage prompt payment, improve collection efforts, or reassess your customer base.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-case-study-nbsp\"><strong>Case study<\/strong>&nbsp;<\/h3>\n\n\n\n<p>To see how this works in practice, consider the case of a small firm we\u2019ll call \u201cMaria\u2019s Bakery\u201d.&nbsp;&nbsp;<\/p>\n\n\n\n<p>The bakery has expanded its customer base by extending credit to small business owners. <\/p>\n\n\n\n<p>At the end of the first year doing this, the company\u2019s AR turnover ratio was 8.2\u2014meaning it gathered its receivables 8.2 times for the year on average.&nbsp;<\/p>\n\n\n\n<p>The bakery can calculate the day ratio by dividing the number of days in the year (365) by the turnover ratio. <\/p>\n\n\n\n<p>In Maria\u2019s case, this is 365\/8.2 = 44.5, which means it takes her just under 45 days to collect from customers.&nbsp;<\/p>\n\n\n\n<p>This is fine if the company has a 45-day payment policy\u2014customers are paying within the terms and the system is running smoothly. <\/p>\n\n\n\n<p>If cashflow problems arise, it may just need to reduce the payment term.&nbsp;<\/p>\n\n\n\n<p>But if Maria deems that invoices need to be paid in 30 days, a 44.5 day ratio could indicate she is extending credit to lower quality customers, or the collection department is not effective.&nbsp;<\/p>\n\n\n\n<p>The bakery could compare this ratio to industry peers to see if it\u2019s an outlier. If similar businesses have a lower day ratio, say 40, Maria\u2019s Bakery could consider how to improve its ratios to make the business more competitive.&nbsp;<\/p>\n\n\n\n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Small business survival toolkit<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get your free guide, business plan template, and cash flow forecast template to help you run your business and achieve your goals.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-aee5a8c2-281d-42bb-8da2-eda5b62f63c6\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download your free toolkit<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<div class=\"single-cta__downloads\">\n\t\t\t\t\t\n\t\t\t\t\t10,548 readers have downloaded this toolkit\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327127856-1440x810.jpg\" class=\"single-cta__image\" alt=\"Female hands working on a laptop\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327127856-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-typical-ar-turnover-ratio-benchmarks-nbsp\"><strong>Typical AR turnover ratio benchmarks<\/strong>&nbsp;<\/h2>\n\n\n\n<p>The bakery case is quite typical of retail in general, although higher rates are more common. <\/p>\n\n\n\n<p>This is because retail businesses tend to have high volumes of cash and credit sales. Grocery stores, in particular, often have daily or weekly turnover. <\/p>\n\n\n\n<p>The standard range for retail is 2 to 20 or higher.&nbsp;<\/p>\n\n\n\n<p>Here are some other <a href=\"https:\/\/csimarket.com\/screening\/index.php?s=rt\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>industry benchmarks<\/strong><\/a> you could expect from them.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-manufacturing-nbsp\"><strong>Manufacturing<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Manufacturers generally have longer credit terms with their business customers. <\/p>\n\n\n\n<p>This is because orders are often large and expensive, and more time is required to produce the goods compared to retail. <\/p>\n\n\n\n<p>Manufacturers may also have more complex billing cycles. <\/p>\n\n\n\n<p>The typical range here would be 4 to 8.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-services-nbsp-nbsp\"><strong>Services&nbsp;<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Service-based businesses such as consulting or IT often have shorter payment terms than manufacturers but longer than retailers. <\/p>\n\n\n\n<p>Factors such as project duration and client payment practices can influence the ratio, which generally falls between 6 and 12.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-healthcare-nbsp\"><strong>Healthcare<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Healthcare providers often face longer payment cycles due to the time required to process insurance claims and the high cost being spread across patient payment plans. <\/p>\n\n\n\n<p>Also, this industry can be heavily effected by economic conditions, further impeding rapid turnover. This gives typical AR rates of 3 to 6.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-improve-your-accounts-receivable-turnover-ratio-nbsp\"><strong>How to improve your accounts receivable turnover ratio<\/strong>&nbsp;<\/h2>\n\n\n\n<p>Improving your ARTR requires a multi-faceted approach. <\/p>\n\n\n\n<p>It may involve optimizing your internal processes, or proactively managing customer accounts. Whatever the case, the key is to identify and address potential payment issues early. <\/p>\n\n\n\n<p>Let\u2019s look at four key areas that can impact the AR turnover ratio:&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-strengthen-credit-policies-nbsp\"><strong>Strengthen credit policies<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Beyond setting basic terms, strengthening credit policies involves assessing your customer\u2019s creditworthiness before extending credit. Implement a formal credit application process, including thorough background checks. <\/p>\n\n\n\n<p>Establish credit limits based on customer financial stability. <\/p>\n\n\n\n<p>Regularly review and update credit limits to reflect changing customer circumstances.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Consider using credit scoring systems to automate credit risk assessment, and offering early payment discounts to incentivize prompt payments. <\/p>\n\n\n\n<p>Develop a clear escalation process for overdue accounts, outlining collection procedures at each stage. <\/p>\n\n\n\n<p>Document all credit-related communication to maintain transparency and accountability.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-automate-invoicing-and-payment-reminders-nbsp\"><strong>Automate invoicing and payment reminders<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Automation drastically reduces overdue payments through timely and consistent communication. <\/p>\n\n\n\n<p>The main feature of this is automatic payment reminders, sent before due dates to minimize missed payments. <\/p>\n\n\n\n<p>Your accounting software should also be able to instantly generate and send invoices as soon as transactions are agreed.&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<p>These systems also produce reports on outstanding invoices, enabling you to prioritize collection efforts. <\/p>\n\n\n\n<p>Furthermore, implementing a system for tracking and prioritizing collections ensures that follow-ups are consistent and efficient. <\/p>\n\n\n\n<p>Regular reviews of your automated AR processes help identify and eliminate bottlenecks, further optimizing your cash flow.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-offer-multiple-payment-options-nbsp\"><strong>Offer multiple payment options<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Flexible payment methods increase collections by catering to diverse customer preferences, giving them the opportunity to pay more promptly. <\/p>\n\n\n\n<p>Their preferred methods could include online payment portals, bank transfers, credit cards, and digital wallets. <\/p>\n\n\n\n<p>Not only are these convenient for your clients, but they are inherently faster, bypassing manual processing. <\/p>\n\n\n\n<p>Providing multiple payment options also demonstrates customer-centricity, fostering goodwill and loyalty.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-optimize-payment-terms-nbsp\"><strong>Optimize payment terms<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Having adjusted your credit policies, you\u2019ll be in a position to strategically define <a href=\"https:\/\/www.sage.com\/en-us\/blog\/invoice-payment-terms-definition-and-tips\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>invoice payment terms<\/strong><\/a> for each client. <\/p>\n\n\n\n<p>Choose the best option to cater to customer needs while incentivizing prompt payments. Common examples are:&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Net 30<\/h3>\n\n\n\n<p>You grant the customer 30 days from the invoice date to make full payment.<\/p>\n\n\n\n<p>It&#8217;s a standard option that provides flexibility for businesses with longer payment cycles.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Early payment discounts<\/h3>\n\n\n\n<p>For example you might offer a 2% discount if the customer pays within a 10 days (denoted as 2\/10 Net 30).<\/p>\n\n\n\n<p>This encourages faster payments and improves cash flow.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Due on receipt<\/h3>\n\n\n\n<p>This means immediate payment as soon as the customer receives the invoice.<\/p>\n\n\n\n<p>It&#8217;s often used for smaller transactions or when prompt payment is essential.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Installments<\/h3>\n\n\n\n<p>Dividing large purchases into smaller, scheduled payments. Often used for long term projects, or high value purchases.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Clearly communicate these terms in your contracts and invoices, detailing due dates, penalties, and accepted payment methods. <\/p>\n\n\n\n<p>Analyze industry standards and customer reliability to determine the most effective terms for your business, balancing cash flow needs with customer relationships. <\/p>\n\n\n\n<p>Most accounting software is designed to allow customization of payment terms so make use of this feature to clearly state what your expectations and client obligations are.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-improve-customer-relationships-nbsp\"><strong>Improve customer relationships<\/strong>&nbsp;<\/h3>\n\n\n\n<p>While automation provides the means for good communication, this is also a matter of willingness and effort. <\/p>\n\n\n\n<p>It pays to promptly and professionally address customer inquiries, demonstrating your commitment to their needs.&nbsp;&nbsp;<\/p>\n\n\n\n<p>On top of that, personalized communication shows that you value their business, further strengthening the relationship. <\/p>\n\n\n\n<p>Consistent follow-up on overdue invoices is essential, but it\u2019s more effective when combined with a positive and supportive relationship.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Regular and transparent communication builds a sense of partnership, fostering trust and rapport, and motivating customers to prioritize timely payments.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-final-thoughts-nbsp\"><strong>Final thoughts<\/strong>&nbsp;<\/h2>\n\n\n\n<p>To streamline accounts receivable management and improve turnover, consider using purpose-built <a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/accounts-receivable\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>accounts receivable software<\/strong><\/a>. <\/p>\n\n\n\n<p>A good solution automates much of the AR process, giving you a solid path to better tracking, invoicing, and collections.&nbsp;<\/p>\n\n\n\n<p>The resulting improvements in efficiency, customer relations and profitability can boost your financial health and the overall success of your business.<\/p>\n\n\n\n<p><em>Editor&#8217;s note: This article was originally published in September 2022 and has been updated for relevance.<\/em><\/p>\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to our Sage Advice Newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get our latest business advice delivered directly to your inbox.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-ab515c6e-7e90-4c2f-a67e-113872516e8b\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Subscribe<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg\" class=\"single-cta__image\" alt=\"Working from home with tea in hand\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The accounts receivable turnover ratio indicates the health of your company. Learn how to calculate it and interpret the results with the help of these examples. <\/p>\n","protected":false},"author":346,"featured_media":13543,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[43,44],"tags":[2,110,195,4,299,153,34,152,155],"business_type":[312],"lilypad":[],"context":[],"industry":[],"persona":[96,97,95],"imagine_tag":[209,468,230,231],"coauthors":[587],"class_list":["post-13542","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","category-strategy-legal-operations","tag-accountants","tag-accounting-101","tag-boss-your-business","tag-business-intelligence","tag-cash-flow","tag-growing-a-business","tag-small-business","tag-starting-a-business","tag-staying-competitive","business_type-accountants"],"sage_meta":{"region":"en-us","author_name":"Stacey McIntosh","featured_image":"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/12\/GettyImages-1325244864.jpg","imagine_tags":{"209":"Accounting","468":"Grow your business","230":"Small business","231":"Start up business"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice US","distributor_original_site_url":"https:\/\/www.sage.com\/en-us\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/13542","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/users\/346"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/comments?post=13542"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/13542\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media\/13543"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media?parent=13542"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/categories?post=13542"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/tags?post=13542"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/business_type?post=13542"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/lilypad?post=13542"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/context?post=13542"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/industry?post=13542"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/persona?post=13542"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/imagine_tag?post=13542"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/coauthors?post=13542"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}