Average accounts receivable is a measure of a company’s ability to collect its outstanding invoices. It is calculated by taking the average of the beginning and ending accounts receivable balances over a period of time.
Key Facts
- Determine the starting and ending accounts receivable balances for the desired time period. This time period can be monthly, quarterly, or annually, depending on your needs.
- Add the starting and ending accounts receivable balances together.
- Divide the sum by 2 to find the average accounts receivable.
Here is the formula for calculating the average accounts receivable:
Average Accounts Receivable = (Starting Accounts Receivable + Ending Accounts Receivable) / 2.
For example, let’s say the starting accounts receivable balance for a month is $10,000 and the ending accounts receivable balance is $15,000. The average accounts receivable would be:
Average Accounts Receivable = ($10,000 + $15,000) / 2 = $12,500.
Formula
The formula for calculating average accounts receivable is as follows:
Average Accounts Receivable = (Starting Accounts Receivable + Ending Accounts Receivable) / 2
Example
Let’s say that a company has the following accounts receivable balances at the beginning and end of a month:
- Beginning Accounts Receivable: $10,000
- Ending Accounts Receivable: $15,000
The average accounts receivable for the month would be:
Average Accounts Receivable = ($10,000 + $15,000) / 2 = $12,500
Interpretation
A high average accounts receivable balance can indicate that a company is having difficulty collecting its invoices. This can be due to a number of factors, such as slow-paying customers, inaccurate invoicing, or a lack of collection procedures.
A low average accounts receivable balance can indicate that a company is collecting its invoices quickly and efficiently. This can be due to a number of factors, such as effective collection procedures, accurate invoicing, and a strong customer base.
Sources
- Accounts Receivable Turnover Ratio
- Receivables Turnover Ratio Defined: Formula, Importance, Examples, Limitations
- How to calculate average net receivables?
FAQs
What is average accounts receivable?
Average accounts receivable is a measure of a company’s ability to collect its outstanding invoices. It is calculated by taking the average of the beginning and ending accounts receivable balances over a period of time.
How do you calculate average accounts receivable?
The formula for calculating average accounts receivable is as follows:
Copy
Average Accounts Receivable = (Starting Accounts Receivable + Ending Accounts Receivable) / 2
What is a good average accounts receivable balance?
A good average accounts receivable balance will vary depending on the industry and the company’s specific circumstances. However, a general rule of thumb is that a company should collect its invoices within 30-60 days.
What can a high average accounts receivable balance indicate?
A high average accounts receivable balance can indicate that a company is having difficulty collecting its invoices. This can be due to a number of factors, such as slow-paying customers, inaccurate invoicing, or a lack of collection procedures.
What can a low average accounts receivable balance indicate?
A low average accounts receivable balance can indicate that a company is collecting its invoices quickly and efficiently. This can be due to a number of factors, such as effective collection procedures, accurate invoicing, and a strong customer base.
How can I improve my average accounts receivable balance?
There are a number of things you can do to improve your average accounts receivable balance, including:
- Implementing effective collection procedures
- Automating your invoicing process
- Offering discounts for early payment
- Following up with customers who are late on payments
What are the consequences of having a high average accounts receivable balance?
Having a high average accounts receivable balance can have a number of negative consequences, including:
- Reduced cash flow
- Increased risk of bad debts
- Difficulty obtaining financing