An efficiency ratio that measures how quickly a company collects its outstanding credit sales, calculated by dividing net credit sales by average accounts receivable. Higher turnover indicates faster collection and better credit management.
Formalized in the mid-20th century as businesses increasingly relied on credit sales, building on traditional credit management practices. The ratio evolved to help assess both the quality of receivables and the effectiveness of collection processes.
Accounts receivable turnover reveals whether a company is a tough debt collector or a pushover - it's the difference between getting paid in 30 days versus 90 days for the same sale! A declining turnover ratio often signals that customers are struggling financially or that the company is loosening credit terms to boost sales, both red flags for investors.
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