Account turnover is the rate at which a company's credit customers pay their bills in full. Analysis of account turnover helps establish how quickly a business has access to the cash that is tied up in accounts receivable.
The turnover of a company's credit accounts is usually expressed as a ratio that is used to determine liquidity. The accounts receivable turnover ratio is calculated by dividing the net credit sales during a sales period by the average receivables. The average receivables can be computed by taking the value of the company's receivables at the start of the period plus the value of receivables at the close of the period and dividing the total by two. A higher ratio indicates that credit customers are paying off their credit extensions quickly, ensuring that the company has better cash flow and liquidity.