What is accounts receivable turnover ratio?

Definition: This is the number of times accounts receivable collected throughout the year.

Formula:
Accounts Receivable Turnover Ratio = annual credit sales / average accounts receivable

An investment in accounts receivable is a necessity for most companies to do business. However, too much receivables or too little can be unhealthy. An abnormally low level can be the result of over ambitious collection efforts or a credit policy that is too tight. These conditions can result in lost sales. An excessive receivables level can be the result of a credit policy that is too loose or inadequate collection efforts. These situations can result in increased bad debt and higher costs.