Average accounts receivable
What is average accounts receivable?
Average accounts receivable describes the figure arrived at by looking at the credit extended by a company and the average amount due at any one time. These debts will fall due at different times over the course of a year, so the figure for average accounts receivable is used to smooth out any distortions.
Where have you heard about average accounts receivable?
The figure for average accounts receivable is used as part of a bigger calculation, to see how efficiently a business is managing to collect what it is owed. Given the vital importance of staying on top of managing credit, average accounts receivable is a key figure.
What you need to know about average accounts receivable.
During the course of a year, amounts due from credit customers will tend to cluster unevenly round certain dates, such as paydays or seasonal holidays. In order to smooth out these 'lumpy' distortions, the figure for accounts receivable on January 1 is added to that for December 31 and the result divided by two. This gives the average accounts receivable. This figure can then be divided into the figure for net credit sales over the same period to give the 'receivables turnover ratio', a measure of the efficiency of credit management. The higher the ratio, the more efficient the management.