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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.
