Understanding AR Turnover
Accounts Receivable Turnover measures how efficiently a company collects credit sales. It shows how many times per year the average AR balance is collected. A ratio of 12 means AR is collected monthly on average.
Days Sales Outstanding (DSO) is the inverse—average days to collect. DSO should be compared to credit terms. If terms are Net 30 but DSO is 45, customers are paying 15 days late on average.
Higher turnover (lower DSO) indicates efficient collections and good credit policies. However, excessively strict credit may limit sales. Balance efficiency with customer relationships.
AR Turnover Interpretation
High Turnover (>10)
Excellent collections. DSO under 36 days. Strong cash flow.
Moderate (6-10)
Average efficiency. DSO 36-60 days. Room for improvement.
Low (4-6)
Slow collections. DSO 60-90 days. Cash flow concern.
Very Low (<4)
Collection problems. DSO 90+ days. Investigate immediately.
Industry Benchmarks
| Industry | Typical DSO | Good DSO | Notes |
|---|---|---|---|
| Retail (Cash) | 0-15 days | <10 days | Mostly cash/card |
| B2B Services | 30-45 days | <35 days | Net 30 terms |
| Manufacturing | 45-60 days | <50 days | Longer terms |
| Construction | 60-90 days | <70 days | Progress billing |
| Healthcare | 40-60 days | <45 days | Insurance processing |
Improving AR Turnover
Invoice Promptly
Send invoices immediately upon delivery. Delays in invoicing delay collection.
Offer Early Payment Discounts
2/10 Net 30 incentivizes early payment. Calculate if discount cost is worth faster cash.
Follow Up Systematically
Call at 7, 14, 21 days past due. Consistent follow-up dramatically improves collections.
Screen Credit Applicants
Check credit before extending terms. Poor credits should pay upfront or COD.
Frequently Asked Questions
Should I use total sales or credit sales?
Use net credit sales for accurate AR turnover. Cash sales don't create receivables. If credit sales aren't disclosed, total sales is used but will overstate turnover.
What if AR turnover is declining?
Declining turnover (rising DSO) signals collection problems. Check: aging of receivables, concentration with slow-payers, economic conditions, changes in credit policy.
How does seasonality affect AR turnover?
Year-end AR may not represent average AR if sales are seasonal. Use average of monthly or quarterly AR for accurate turnover. Or calculate for each season separately.
Can AR turnover be too high?
Possibly. Very high turnover might mean overly strict credit terms that discourage sales. Compare to competitors. Some lost sales from easy credit may be worth the risk.