How to Calculate Accounts Receivable Turnover

The turnover of accounts receivable is a term used in finance, banking, securities and financial securities. It consists of the proportion between the total annual sales on credit and the average of accounts pending collection.

The result that we would obtain from that division would be the number of times that the accounts receivable rotate during the business year. To determine the days of sale receivable, or average time that the company must wait after making a sale to receive cash, the days in the year are divided by the turnover of accounts receivable.

The accounts receivable turnover rate shows, in short, the speed with which a company collects its accounts. That is, the ability to transform them into cash.

To arrive at this calculation, first of all, determine the average of accounts receivable by adding the balance at the beginning of the year plus the balance at the end of the year and then dividing by two. Subsequently, the total net credit sales must be divided by the net balance of accounts receivable. The result indicates the number of times that the accounts receivable balance has rotated during the period.

The following would be the correct mathematical formula in this regard: ICC (Accounts Receivable Turnover Index) = VNC (Net Sales on Credit) / ((Initial CxC Balance + Ending CxC Balance) / 2).

In other words, we are looking at a meter of the number of times that accounts receivable are collected during the accounting period.

It is calculated by dividing the amount of credit sales with the average of the accounts receivable account.

There is another option to finish calculating the turnover of the accounts receivable but in this case in days, instead of in times. In this situation, the formula would be as follows: Accounts Receivable  Turnover = Accounts Receivable x 360  / Sales

Portfolio Turnover Days Index

To obtain the index of days of portfolio turnover, we must take the net sales on credit to divide them by 360. This index has the same purpose as the previous one in terms of the transformation of accounts receivable into money, but in this case they are measured how many days a sale remains as an account receivable.

Then, the average of accounts receivable must be determined, adding the balance at the beginning of the year with the balance at the end of the year and then dividing it by two. The accounts receivable balance at the beginning of a period is equal to the end of the previous period.

Subsequently, the average accounts receivable is divided by the daily net sales obtained. The result corresponds to the Portfolio Days Index whose formula is shown below: IDC (Portfolio Turnover Days Index) = ((Initial CxC Balance + Final CxC Balance) / 2)) / (VNC (Net Credit Sales) ) / 360.

 

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