How to find average accounts receivable on a balance sheet.
The average accounts receivable figure is needed to avoid measurement problems.There are situations in which the ending accounts receivable balance is incorrect.There are problems with using the ending accounts receivable balance.
Since many companies structure their fiscal years to correspond with their lowest business levels, the year-end accounts receivable balance may be well toward the low end.
A single account receivable amount on a specific day may be high or low, just because a single large invoice may have been paid too early or late.
When calculating an average accounts receivable balance, it is easy to use the month-end balance because the information is always recorded in the balance sheet.This means that the average amount may be high.Even if the receivable balance for other dates of the month is not available, it is still the most accessible information.
If you have a seasonal business, the best method for calculating average accounts receivable is to average the ending accounts receivables balance for every month of the last 12 months.You will usually include the receivable balance from at least a few months in the preceding fiscal year in this calculation.
If you have a rapidly growing business, using the average receivable balance for the last 12 months will understate the amount of receivables to be expected.The average receivable for a declining business would be overstated.It would be more accurate to average the accounts receivable over the last three months.
When should the average accounts receivable calculation be used?It is possible that the lender can estimate an average funding requirement.It can be used for the estimation of the working capital levels.Since day-to-day variations in the actual receivable level may be very different from the long-term average, you should not use it when conducting cash flow planning.The lender can determine the most appropriate maximum funding level if you show a prospective lender your estimated accounts receivable level in every period over which lending may occur.