How to calculate average accounts receivable
/The average accounts receivable figure is needed in certain situations to avoid measurement problems. When you calculate an average accounts receivable balance, it is easiest to use the month-end balance for each month measured, simply because this information is always recorded in the balance sheet, and so is always available in the accounting records. This means that the average amount may be somewhat high, since a large amount of billings tend to be issued on the last day of each month. Still, it is the most accessible information, especially if you are compiling information from previous months or years where the receivable balance for other dates of the month simply is not available.
Average Receivables for a Seasonal Business
If you have a strongly seasonal business, the best method for calculating average accounts receivable is to average the ending accounts receivable balance for every month of the last 12 months, thereby incorporating the complete effects of seasonality into the calculation. Please note that this is a trailing 12 months calculation, so you will usually be including the receivable balance from at least a few months in the preceding fiscal year.
Average Receivables for a Growing Business
If you have a rapidly growing business, then using the average receivable balance for the last 12 months will understate the amount of receivables to be expected on a go-forward basis. Conversely, the average receivable reported for a declining business would be overstated. In these cases, it would be more accurate to average the accounts receivable over just the last three months. If the rate of growth or decline is extremely fast, then it might make more sense to calculate the average receivables figure based on just the last two months.
Related AccountingTools Courses
Credit and Collection Guidebook
The Interpretation of Financial Statements
When to Use Average Accounts Receivable
When should you use the average accounts receivable calculation? Lenders may want to know, so that they can estimate an average possible funding requirement. It may also be useful for the general estimation of budgeted working capital levels. However, you should not use it when conducting cash flow planning, since day-to-day variations in the actual receivable level may be very different from the long-term average. Also, always show a prospective lender your estimated accounts receivable level in every period over which lending may occur, so the lender can determine the most appropriate maximum funding level - presenting an average balance is not helpful in this situation.