What is the impact of having a low accounts receivable turnover ratio?

A low accounts receivable turnover ratio signifies that a company is not collecting its receivables efficiently. This ratio measures how many times a company collects its average accounts receivable during a period, and a lower ratio indicates that customers are taking longer to pay their outstanding invoices.

When the turnover ratio is low, it suggests potential challenges in the company's credit and collection processes, which could lead to cash flow problems. Companies that struggle to convert sales on credit into cash may find it difficult to meet their operational expenses or invest in growth opportunities.

Higher turnover ratios typically indicate effective credit practices and prompt collection of accounts receivable, reflecting a healthier cash flow situation. Thus, a low ratio serves as an alert that the company may need to reassess its credit policies, collection strategies, or customer payment behaviors, as these factors can have a significant impact on overall financial health.