Change in Accounts Receivable

Definition:

Change in Accounts Receivable refers to the difference in the accounts receivable balance from one accounting period to the next. It indicates how much more or less the company is owed by its customers over a specific period.

Examples

If a company had accounts receivable of $100,000 at the end of last quarter and $120,000 at the end of this quarter, the change in accounts receivable is $20,000. This suggests that the company is owed $20,000 more by its customers compared to the previous quarter.

Formula:

Change in Accounts Receivable = Accounts Receivable at End of Period - Accounts Receivable at Beginning of Period

How to use the metric:

This metric is used to assess the efficiency of a company's credit policies and its ability to collect payments from customers. A significant increase in accounts receivable might indicate that the company is having trouble collecting payments, while a decrease could suggest improved collection efforts or tighter credit policies.

Limitations:

Change in Accounts Receivable does not provide insights into the quality of the receivables or the likelihood of collection. It also doesn't account for seasonal variations or changes in sales volume, which can naturally affect the accounts receivable balance.

Applies to:

This metric is particularly relevant in industries where sales are made on credit, such as manufacturing, wholesale, and retail.

Doesn't apply to:

Industries that primarily operate on a cash basis, such as some service industries, may not find this metric as relevant because they do not typically have significant accounts receivable balances.

Summary:

Change in Accounts Receivable is a financial metric that measures the difference in the amount owed to a company by its customers over a specific period. It is useful for assessing credit policy efficiency and collection efforts but has limitations in terms of providing insights into receivable quality and seasonal sales variations. It is most applicable in credit-heavy industries and less relevant in cash-based sectors.