What does accounts receivables turnover measure?

Accounts receivables turnover is a financial metric that indicates how many times a company collects its average accounts receivable during a specific period, typically a year. A higher turnover ratio suggests that the company is efficient in managing its receivables, meaning it collects payments from customers promptly and effectively. This can positively influence cash flow, as it indicates the company turns its credit sales into cash efficiently.

In practice, this turnover ratio is calculated by dividing net credit sales by the average accounts receivable during a specific period. A company with a higher accounts receivables turnover is often seen as having strong financial health, as it shows that customers are paying their invoices on time, which can lead to improved liquidity and less risk of bad debts.

Understanding this metric is crucial for companies as it helps to identify collections performance, optimize credit policies, and enhance cash management strategies.