Inventory Turnover Rate

The accounts receivable turnover ratio indicates how quickly a company receives payment from its customers. This key figure is used to assess the effectiveness of accounts receivable management and provides a clear picture of how the company’s cash flow is developing. The faster customers pay, the less capital is tied up in accounts receivable.

How is the inventory turnover rate calculated?

The calculation is based on revenue and average accounts receivable from customers:

Inventory Turnover = Net Sales / Average Inventory

Net revenue is the company's total sales revenue for the period.

Accounts receivable are the receivables reported on the balance sheet as “trade receivables.” The average balance is typically calculated as (accounts receivable at the beginning of the period + accounts receivable at the end of the period) / 2.

Example:
Net sales: 12,000,000 DKK
Average accounts receivable: 2,000,000 DKK
Inventory turnover: 6

This means that the company receives payment six times a year, on average. This translates to an average credit period of approximately two months (12 / 6).

What does this key figure tell us?

The accounts receivable turnover ratio provides insight into customers’ payment behavior and the company’s credit management. A high figure indicates that customers pay quickly, which strengthens liquidity and reduces the risk of losses. Conversely, a low figure may point to long payment terms, a lack of follow-up, or customers with weak payment capacity.

This key figure should always be evaluated in the context of the company’s credit policy and industry, as payment patterns vary significantly.

Why is the inventory turnover rate important?

The turnover ratio is closely linked to liquidity and capital tied up. When payments are delayed, capital is tied up in accounts receivable that could otherwise be used for operations, investments, or debt repayments. For this reason, banks, suppliers, and other business partners often use this key figure as an indicator of how stable a company’s financial position is.

A decrease in the turnover rate may be an early sign of:

• a decline in customers' payment discipline
• increased credit risk
• upcoming liquidity pressures

What is a good turnover rate?

There is no single "correct" level. It depends on the industry, the type of customer, and the payment terms. Some companies operate with short payment terms and high inventory turnover, while others accept longer credit terms as part of their business model.

The most important thing is to:

• compare with the industry average
• track developments over time
• View this key figure in the context of the liquidity ratio and earnings

Inventory Turnover and Qatchr

In Qatchr, Collectia’s platform for credit reports and financial data, the inventory turnover ratio is not displayed as a pre-calculated key metric. Instead, you have access to the necessary financial figures—including net revenue and accounts receivable—which allow you to calculate and analyze this key metric.

When these figures are combined with information on payment behavior, liquidity, and other key financial ratios, they provide a solid basis for assessing customers’ ability to pay and trends in the company’s cash flow over time.