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Average Accounts Receivable

Average Accounts Receivable represents the average amount of money owed to a business by its customers over a specific period, typically calculated on a monthly, quarterly, or annual basis. This metric is important because it provides insight into how efficiently a company is managing its credit sales and collecting payments from customers. By calculating the average accounts receivable, businesses can better understand their cash flow dynamics and identify potential issues with delayed payments. To calculate this metric, add the beginning and ending accounts receivable balances for the period and divide by two.

Example

If a company’s accounts receivable balance is $80,000 at the beginning of the year and $120,000 at the end, the average accounts receivable for the year would be $100,000. This average helps the company assess its effectiveness in managing credit and collecting payments.

Key points

• Provides a snapshot of how much money customers owe to a business on average over a period.

• Useful for analyzing a company's cash flow and credit management efficiency.

• Integral in calculating financial ratios like the accounts receivable turnover ratio.

Quick Answers to Curious Questions

It helps businesses ensure they are collecting payments efficiently, which is crucial for maintaining healthy cash flow and avoiding potential liquidity problems.

By adding the beginning and ending balances of accounts receivable for a period and then dividing by two.

A high average could suggest that customers are taking longer to pay, potentially signaling issues with credit policies or customer payment practices.