Mastering the Accounts Receivable Turnover Ratio
Managing cash flow is crucial in the hospitality industry, particularly for restaurants and hotels. The Accounts Receivable Turnover Ratio is a powerful metric that highlights how efficiently payments are collected from customers. It’s especially relevant for businesses managing catering contracts, group bookings, or franchise operations that often involve credit sales.
At Over Easy Office, we empower accounting firms serving the hospitality industry by providing skilled back-office professionals who specialize in restaurant and hotel accounting. This includes ensuring smooth accounts receivable processes through tailored staff augmentation solutions.
What Is the Accounts Receivable Turnover Ratio?
The Accounts Receivable Turnover Ratio measures how effectively a business collects outstanding payments over a given period. For restaurants, this can include revenue from event catering, large group reservations, or partnerships with delivery platforms. A high turnover ratio signals efficient cash flow management, enabling businesses to meet operational needs seamlessly.
For hospitality businesses looking to improve profitability through better financial processes, understanding essential accounting principles is a great starting point. Explore Essential Accounting Formulas Every Owner Should Know to gain a foundational understanding of restaurant finances.
How to Calculate the Accounts Receivable Turnover Ratio
The formula is:
Accounts Receivable Turnover Ratio = Net Credit Sales ÷ Average Accounts Receivable
Steps to Calculate with Restaurant-Specific Examples
Calculate Net Credit Sales:
Net credit sales are the total sales made on credit, excluding any returns or allowances. For example, a restaurant providing catering services may have:Total Catering Revenue: $120,000
Returns or Adjustments: $5,000
Net Credit Sales = $120,000 - $5,000 = $115,000
Determine Average Accounts Receivable:
Average accounts receivable is the average of the beginning and ending balances of accounts receivable over a period.Beginning Accounts Receivable: $30,000
Ending Accounts Receivable: $40,000
Average Accounts Receivable = ($30,000 + $40,000) ÷ 2 = $35,000
Compute the Accounts Receivable Turnover Ratio:
Using the values above:
Accounts Receivable Turnover Ratio = $115,000 ÷ $35,000 = 3.29
This means the restaurant collects its accounts receivable approximately 3.29 times during the period.
Example: Group Reservations for a Restaurant Chain
Let’s consider a restaurant chain that manages corporate event bookings.
Net Credit Sales: $500,000 (corporate event bookings and large group reservations)
Beginning Accounts Receivable: $100,000
Ending Accounts Receivable: $150,000
Average Accounts Receivable = ($100,000 + $150,000) ÷ 2 = $125,000
Accounts Receivable Turnover Ratio = $500,000 ÷ $125,000 = 4
This indicates the restaurant chain collects outstanding payments four times annually, reflecting efficient management of receivables.
For hospitality businesses exploring outsourcing solutions to improve financial processes, check out why outsourcing to the Philippines or nearshoring to Latam works for them to see how leveraging global talent can streamline accounting operations.
Converting the Ratio to Days: Average Collection Period
To understand the time it takes to collect payments:
Average Collection Period = 365 ÷ Accounts Receivable Turnover Ratio
For the above example:
Average Collection Period = 365 ÷ 4 = 91 days
It takes approximately 91 days to collect payments. By shortening this period, restaurants can improve cash flow for day-to-day expenses like inventory, payroll, and utilities.
Tips to Improve the Ratio in Restaurants
Streamline Catering and Event Payment Terms: Offer discounts for early payments or require deposits upfront to reduce receivables.
Automate Invoicing and Follow-Ups: Use technology to send reminders for outstanding invoices, reducing manual effort.
Track Payment Trends: Regularly analyze overdue accounts to identify and address bottlenecks.
Maintain Open Communication with Clients: Especially for repeat customers like corporate accounts or large bookings, build relationships to encourage timely payments.
If your restaurant is growing rapidly and you’re finding it difficult to keep up with back-office demands, explore the benefits of Outsourced Bookkeeping: The Secret Sauce for Growing Restaurants to free up time and resources for scaling your operations.
Diagram: Accounts Receivable Workflow in Restaurants
Make it stand out
This flow demonstrates how efficient accounts receivable processes directly support operational stability in restaurants.
Strengthening Hospitality Accounting with Over Easy Office
In the restaurant industry, managing accounts receivables effectively isn’t just about financial health—it’s about ensuring seamless operations and customer satisfaction. Monitoring and improving your Accounts Receivable Turnover Ratio is key to staying competitive and agile.
At Over Easy Office, we specialize in supporting accounting firms that serve restaurants, hotels, and other hospitality businesses. Our staff augmentation services provide expert back-office professionals trained in handling accounts receivable tasks, invoicing, and payment follow-ups, allowing your firm to deliver exceptional results for clients.
Interested in streamlining your accounting services for hospitality clients? Contact us today to learn how we can help your team succeed.