Description: Some people find that the accounts receivable turnover figure is easier to understand if it is expressed in terms of the average number of days that accounts receivable are outstanding. This format is particularly useful when it is compared to the standard number of days of credit granted to customers. For example, if the average collection period is sixty days and the standard days of credit is thirty, then customers are taking much too long to pay their invoices. A sign of good performance is when the average receivable collection period is only a few days longer than the standard days of credit.
Formula: Divide annual credit sales by 365 days, and divide the result into average accounts receivable. The formula is as follows:
Average Accounts Receivable
Annual Sales/365
Cautions: The main issue is what figure to use for annual sales. If the total sales for the year are used, this may result in a skewed measurement, since the sales associated with the current outstanding accounts receivable may be significantly higher or lower than the average level of sales represented by the annual sales figure. This problem is especially common when sales are highly seasonal. A better approach is to annualize the sales figure for the period covered by the bulk of the existing accounts receivable.