What is Average Net Receivables?

Average Net Receivables

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Average Net Receivables

Average net receivables is a financial metric used to evaluate a company’s effectiveness in managing its accounts receivable. It is calculated by taking the average of a company’s beginning and ending net accounts receivable over a specific period, usually a year. Net accounts receivable is the total accounts receivable minus any allowances for doubtful accounts. The average net receivables metric is often used in conjunction with the accounts receivable turnover ratio to assess the efficiency of a company’s credit and collection policies.

To calculate the average net receivables, use the following formula:

\(\text{Average Net Receivables} = \frac{\text{Beginning Net Receivables + Ending Net Receivables}}{2} \)

Example of Average Net Receivables

Here’s an example illustrating the use of average net receivables in assessing a company’s accounts receivable management:

Company ABC is in the business of manufacturing electronics. Over the year, the company’s net accounts receivable figures are as follows:

First, we need to calculate the average net receivables for Company ABC:

\(\text{Average Net Receivables} = \frac{\text{Beginning Net Receivables + Ending Net Receivables}}{2} \)
\(= \frac{80,000 + 100,000}{2} \)
\(= \frac{180,000}{2} \)
= $90,000

Now, let’s assume that the company’s total net credit sales during the year amount to $900,000. We can calculate the accounts receivable turnover ratio using the following formula:

\(\text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Net Receivabless}} \)

In this case:

\(\text{Accounts Receivable Turnover Ratio} = \frac{900,000}{90,000} = 10 \)

The accounts receivable turnover ratio of 10 means that, on average, Company ABC collects its receivables ten times per year. This information can be helpful for the management to assess the efficiency of their credit and collection policies and make adjustments if necessary.

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