AVERAGE NET RECEIVABLES Meaning and
Definition
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Average net receivables refers to the total amount of money owed to a company by its customers or clients after deducting any amounts that are deemed uncollectible. It is a key financial metric used to determine the average value of accounts receivable (the money owed by customers) over a specific period of time.
To calculate average net receivables, one must first add the opening accounts receivable balance at the beginning of the period to the closing accounts receivable balance at the end of the period. This total is then divided by two to obtain the average value.
This metric is valuable to businesses as it provides insight into the efficiency of their credit and collection processes. By tracking changes in average net receivables, companies can assess the effectiveness of their credit policies and evaluate whether their customers are paying promptly or experiencing difficulty in settling their debts. It also helps in the estimation of cash flow projections and assists in calculating vital financial ratios like days sales outstanding (DSO).
Average net receivables is an important indicator of a company's liquidity, and it enables management to make informed decisions regarding credit terms, debt collection strategies, and overall financial health. By monitoring and analyzing this metric, organizations can aim to minimize bad debts, improve cash flow management, and enhance their overall financial performance.
