AVERAGE AGE OF ACCOUNTS RECEIVABLE
Average Age of Accounts Receivable - The weighted-average age of all the firm's outstanding invoices. When reviewing a company's financial health the average age of accounts receivable is meaningful when compared to the credit and collection policy and the industry in which the company operates. A company that is in an industry that typically extends 45 day credit will have a different ratio than a company in an industry that extends 15 day credit - such as pharmacy wholesalers.
The formula to calculate Average Age of Accounts Receivable is:
Number of days in measurement period / accounts receivable turnover.
Example:
AMERISOURCEBERGEN
CORPORATION
-
accounts receivable
turnover
for its fiscal
year ended September 30,
2007 was 19.2 times.
AmerisourceBergen's
Average Age of Accounts
Receivable
was:
365 days / 19.2 which
equates to 19 days.
This is indicative of
the wholesale pharmacy
business which is
typically a 15 day pay.
Now a quarterly look at
AmerisourceBergen's
Average Age of Accounts
Receivable:
Accounts receivable turnover for its fiscal fourth quarter ended September 30, 2007 was 18.7 times. Now the quarter is only 90 days so the calculation for Average Age of Accounts Receivable for the quarter was:
90 days / 4.7
times AR turned over
(for this calculation do
not annualize) which
equates to 19.1 days -
As can be seen there
was a slight increase in
the Average Age of
Accounts Receivable in the fourth
quarter.