Average accounts receivable helps you measure how much money your customers typically owe over a certain period. To find the average accounts receivable, add the beginning and ending AR balances for a period and divide by two. This metric helps businesses measure customer payment trends and evaluate cash flow efficiency.
Understand What Average Accounts Receivable Means
Average accounts receivable is the midpoint between your beginning and ending accounts receivable balances during a period.
For example, if your receivables at the start of the year were $50,000 and by year-end they were $70,000, then the average accounts receivable is $60,000.
This average smooths out fluctuations and provides a more accurate picture of customer payment behavior.
Gather Beginning and Ending Accounts Receivable Balances
To calculate accurately, collect your receivables data:
- Beginning accounts receivable: The balance at the start of the period (e.g., the first day of the month, quarter, or year).
- Ending accounts receivable: The balance at the end of the same period.
You can find these numbers on your balance sheet under current assets.
Example:
Apply the Formula
The formula for calculating average accounts receivable is simple:
Average Accounts Receivable = (Beginning AR + Ending AR) ÷ 2
Using our earlier example: ( $50,000 + $70,000 ) ÷ 2 = $60,000
This means on average, your customers owed your business $60,000 throughout the year.
Adjust for Seasonal Businesses (If Applicable)
For businesses with strong seasonal trends (like retail or tourism), calculating the average using only the beginning and ending balance may not reflect reality. Instead, you can take balances from multiple intervals (monthly or quarterly) and then average them.
Example with Quarterly Balances:
Average = (40,000 + 60,000 + 80,000 + 100,000) ÷ 4 = $70,000
This approach gives a more accurate picture when customer payments vary significantly during the year.
Interpret the Results
Once you have the average, it’s time to analyze what it means for your business.
- A high average AR may suggest slow collections or that you’re extending too much credit.
- A low average AR may indicate efficient collections and strong cash flow.
It’s also helpful to compare your average AR against industry benchmarks to understand whether your receivable levels are normal.
Use Average Accounts Receivable in Other Metrics
Average AR is not just a standalone number. It plays a big role in financial analysis:
- Accounts Receivable Turnover Ratio = Net Credit Sales ÷ Average AR
- Days Sales Outstanding (DSO) = (Average AR ÷ Net Credit Sales) × Number of Days
Both metrics help you evaluate how quickly you’re converting credit sales into cash.
Example of How to Find Average Accounts Receivable
Imagine your business made $600,000 in net credit sales in a year. If your beginning AR was $50,000 and your ending AR was $70,000, then:
- Average AR = ($50,000 + $70,000) ÷ 2 = $60,000
- Accounts Receivable Turnover = $600,000 ÷ $60,000 = 10 times
- DSO = ( $60,000 ÷ $600,000 ) × 365 = 36.5 days
This tells you that, on average, it takes about 37 days to collect payments from customers.
Calculate net accounts receivable by subtracting allowances for doubtful accounts from total AR to see the actual expected cash inflow for accurate financials.
To calculate gross accounts receivable, total all outstanding invoices before allowances, track unpaid balances, and monitor cash flow for effective collections.
To calculate accounts receivable turnover, divide net credit sales by average receivables to track how quickly customers pay and improve cash flow.
To calculate days in accounts receivable, divide AR by net credit sales and multiply by days. Track AR days to spot delays and improve cash flow.
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