What is accounts receivable turnover?
How many times receivables are collected and replaced in a period. An HVAC shop reads it from credit sales against the average receivable balance.
Definition
Accounts receivable turnover is how often, in a period, the shop collects what customers owe and replaces that balance with new invoices. On the books, it is a reading of accounts receivable against credit sales, not a ledger account you debit.
An HVAC shop uses it to see whether invoiced jobs are clearing and being replaced at a healthy pace. A higher figure means the receivable pile turned more times; a lower figure means the same invoices sat longer.
It is a count of turns, not a count of days. One slow commercial account can pull the average balance up and the turns down even when homeowners pay on time.
Stay with how often the balance was collected and rebuilt. Cash arrives when an invoice is collected; this page asks how many times that happened relative to the average pile.
Where it shows up
Balance Sheet: Related to accounts receivable turning over.
P&L: Related to credit sales in the period.
Cash flow: Related to how often those sales become cash.
See also: Accounts Receivable · Days Sales Outstanding · Net Revenue
When you look at the Balance Sheet, this reading starts from the accounts receivable total. You will not find a line labeled with these turns.
The Income Statement supplies the credit sales in the period. Cash jobs never sat as invoices, so they do not belong in that sales figure.
On the Statement of Cash Flows, more turns usually pair with collections coming in. Changes in working capital will show that cash effect even when leftover profit looks fine.
When the figure is high, the shop is collecting and re-invoicing often. When it is low, a larger share of last period's work is still sitting as unpaid invoices.
How it works
Take credit sales for the period. Divide by average accounts receivable.
Average accounts receivable is the beginning balance plus the ending balance, divided by two. A shop that started the year at $36,000 and ended at $44,000 has an average of $40,000.
The result is how many times that average balance was collected and replaced. Nine times means the pile turned nine times in the period.
Net revenue after returns and discounts is the usual sales figure when almost all work is invoiced. Stay with credit sales when cash jobs are mixed in.
Use credit sales, not total revenue, when some jobs are paid at the truck. Mixing cash jobs into the top number makes the pile look like it turned faster than it did.
Stay with this count of turns. Converting the same relationship into a wait in days is a different reading.
The figure goes up when collections catch up or the average balance shrinks. It goes down when invoices pile up or a few large jobs sit.
Allowance for doubtful accounts can sit against the receivable total. Use the receivable figure the shop actually tracks for this reading, and stay consistent from period to period.
After the period closes, recompute with the new average and that period's credit sales. Last year's 9.0 times is history.
Example
Harbor HVAC invoices most jobs on account. Credit sales for the year were $360,000, and average accounts receivable was $40,000.
Divide $360,000 by $40,000. The result is 9.0 times.
Those nine turns mean the average invoice pile was collected and replaced nine times in the year. The shop is not reading days here; it is reading how often the balance turned.
If the same year's credit sales had sat against $60,000 of average receivables, the figure would have been 6.0 times. The work booked would be the same; the pile would have turned more slowly.
A $20,000 commercial rooftop that sits for months will pull the average balance up and the turns down. Collecting that job later raises cash without booking a second sale.
If next year credit sales stay $360,000 and average receivables fall to $30,000, the figure rises to 12 times. Cash came back faster without a change in the work on the Income Statement.
The shop does not post a line that says these turns. The books already hold the invoices and the credit sales; you divide.
Common mix-ups
Accounts receivable turnover is not the receivable balance. The balance is a dollar total; this page is how many times that total was collected and replaced.
Accounts receivable turnover is not days sales outstanding. Days convert the same relationship into a wait; this page stays on the count of turns.
Accounts receivable turnover is not net income. A profitable year can still show a slow pile if invoices sit.
Related terms
- Accounts Receivable: Money customers owe the business for goods or services already delivered.
- Days Sales Outstanding: The average number of days it takes to collect an invoice.
- Net Revenue: Gross sales after returns, discounts, and allowances are subtracted.
- Collections: The process of following up on unpaid customer invoices.
- Accounts Receivable Aging: A report bucketing open invoices by how long they have been outstanding.
- Allowance For Doubtful Accounts: A contra-asset reserve estimating the share of receivables that will not be collected.
- Credit Limit: The maximum balance a customer is allowed to carry on account.
- Cash Conversion Cycle: The number of days between paying for inputs and collecting from customers.