- What is the AR turnover ratio?
- List of different industry average accounts receivable turnover ratio and DSO
- How to improve your accounts receivable turnover ratio?
- How can HighRadius help lower your accounts receivable turnover ratio?
What is Average Accounts Receivable Turnover Ratio?
Accounts Receivable Turnover is a metric that estimates how effectively a business can convert its credit transactions to cash.
The average accounts receivable(AR) ratio indicates whether a business is able to collect its dues efficiently. It is also known as the debtors turnover ratio. A higher AR turnover ratio indicates that the business can collect its total receivables many times over in a particular period.
To calculate the average accounts receivable, add the beginning and ending accounts receivable balances for the period and divide by two.
Businesses can also calculate the average accounts receivable days (DSO) by dividing the number of days in the accounting period by the turnover ratio. Rather than looking at the AR ratio and DSO of a business in isolation, benchmarking it against the industry average provides a better perspective of the company’s collection strategies. A lower AR ratio compared to the industry average indicates poor collections and vice-versa.
List of different industry average accounts receivable turnover ratio and DSO
Here is a list of the industry average accounts receivable turnover ratio and DSO for Q4 2022.
|Ranking||Receivable Turnover Ratio Ranking by Sector||Ratio|
|4||Consumer Non Cyclical||11.36|
Learn more about Accounts Receivable Turnover Ratio and how to use it for AR optimization.
How to improve your accounts receivable turnover ratio?
The accounts receivable turnover ratio is a direct measure of a company’s ability to collect its past dues. In order to improve this ratio, you need to focus on the multiple sub-functions within your order-to-cash process.
Here are a few pointers to help you out.
1. Send invoices on time
The first step in the order-to-cash process is to send timely and well-documented invoices that clearly mention all the payment terms. It ensures there is clarity on when the customer needs to clear their dues.
2. Make it easy for the customer to pay
Businesses can make it easier for customers to pay by offering multiple payment options like checks, e-payments, and ACH. Embedding payment links in dunning emails also supports faster collections. These measures help ensure there is very little friction in the payment process.
3. Collect proactively
A proactive collection process helps businesses identify at-risk customers and reach out to them based on priority. This ensures that there are fewer delinquent accounts and that bad debt is minimized.
4. Give incentives for early payments
You can increase the chances of quicker payments by offering early payment discounts. For example, businesses can offer a 2% discount if customers pay within 10 days. If you want customers to pay upfront, you can offer higher discounts to those who pay in cash when the product/service is delivered or on a date prior to it.
How can HighRadius help improve your accounts receivable turnover ratio?
Automating the e-invoicing and collections process is the key to maintaining healthy accounts receivable turnover ratio. Automation boosts collection speed and enables your business to recover AR 75% faster.
HighRadius RadiusOne e-invoicing and collections application help streamline invoice delivery and ensure that your customers always receive it on time. It also supports multiple payment methods and a self-service portal to offer customers a frictionless payment experience.
Our solution also offers prioritized worklists making it easier for collectors to target at-risk customers. It also provides insights using real-time data and reports on what next steps to take on each customer account to maximize cash recovery.
1. What is a good account receivable turnover ratio?
A good accounts receivable turnover ratio varies by industry and company. A higher ratio is generally better as it indicates a company is collecting payment from its customers more efficiently and managing its cash flow more effectively. The industry average is 17.62 for retail and 9.98 for energy.
2. Is a high AR turnover ratio good?
The higher a business’s turnover ratio, the better it is for cash flow and day-to-day operations. It shows a company’s ability to collect its AR multiple times a year and indicates that customers pay on time.
3. What types of companies have high accounts receivable?
Companies that offer services or goods on credit with specified payment terms on their invoices are most likely to have accounts receivable as an asset on their financial statements.
4.How to calculate average accounts receivable turnover ratio?
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable Here:
Net Credit Sales is the cash collected from sales.
Formula to calculate Net Credit Sales = Sales on credit – Sales returns – Sales allowances.
Average Accounts Receivable is the sum of the first and last accounts receivable over a monthly or quarterly period, divided by 2.