What is accounts receivable? It's an efficiency ratio or activity ratio that measures how many times a business can turn its accounts receivable into cash during a period. In other words, the accounts receivable turnover ratio measures how many times a business can collect its average accounts receivable during the year.
A turn refers to each time a company collects its average receivables. If a company had $20,000 of average receivables during the year and collected $40,000 of receivables during the year, the company would have turned its accounts receivable twice because it collected twice the amount of average receivables.
This ratio shows how efficient a company is at collecting its credit sales from customers. Some companies collect their receivables from customers in 90 days while other take up to 6 months to collect from customers.
In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well. Companies are more liquid the faster they can covert their receivables into cash.