How to Calculate Percentage of Accounts Receivable

Accounts receivable is a key financial metric that represents money owed to your business by customers for goods or services delivered but not yet paid. Calculating the percentage of accounts receivable helps assess your company's liquidity and financial health. This guide explains how to calculate it accurately and what the result means.

What is Accounts Receivable?

Accounts receivable (AR) refers to the money that customers owe your business for products or services provided but not yet paid. It's a critical component of your company's working capital and is tracked on the balance sheet under current assets.

Managing accounts receivable effectively is important for several reasons:

It provides insight into your company's cash flow and liquidity
It helps assess your credit risk and collection efficiency
It impacts your cash conversion cycle and days sales outstanding
It affects your financial ratios like the current ratio and quick ratio

The percentage of accounts receivable is calculated by comparing the total amount of accounts receivable to another financial metric, typically total assets or total current assets.

How to Calculate Percentage of Accounts Receivable

Calculating the percentage of accounts receivable involves a simple formula that compares your accounts receivable to another financial metric. Here's the step-by-step process:

Determine your total accounts receivable amount
Identify the relevant comparison metric (usually total assets or total current assets)
Divide accounts receivable by the comparison metric
Multiply by 100 to convert to a percentage

The result shows what percentage of your total assets or current assets are tied up in accounts receivable. A higher percentage may indicate stronger cash flow but also higher credit risk.

The Formula Explained

Percentage of Accounts Receivable Formula

Percentage of Accounts Receivable = (Accounts Receivable ÷ Comparison Metric) × 100

Where:

Accounts Receivable = Total amount owed by customers
Comparison Metric = Typically Total Assets or Total Current Assets

This formula provides a simple ratio that helps compare your accounts receivable to your overall financial position. The result is expressed as a percentage, making it easy to compare across different companies or time periods.

For example, if your company has $500,000 in accounts receivable and $2,000,000 in total assets, the percentage would be 25%. This means 25% of your total assets are tied up in money owed to you by customers.

Worked Example

Let's walk through a practical example to demonstrate how to calculate the percentage of accounts receivable.

Example Scenario

Company XYZ has the following financial data:

Accounts Receivable: $350,000
Total Assets: $1,400,000

To calculate the percentage of accounts receivable:

Divide accounts receivable by total assets: 350,000 ÷ 1,400,000 = 0.25
Multiply by 100 to get the percentage: 0.25 × 100 = 25%

The result shows that 25% of Company XYZ's total assets are tied up in accounts receivable. This indicates that a quarter of the company's total assets are owed to customers rather than invested in other assets.

Note: The comparison metric can vary. Some companies use total current assets instead of total assets to focus on more liquid assets.

When to Use This Calculation

The percentage of accounts receivable is most useful in these situations:

When analyzing your company's liquidity and working capital
When comparing your accounts receivable to other financial metrics
When evaluating your credit collection efficiency
When assessing your cash conversion cycle
When preparing financial statements and reports

Understanding this percentage helps you make informed decisions about your cash flow management, credit policies, and overall financial strategy.

Frequently Asked Questions

What is a good percentage for accounts receivable?

A good percentage depends on your industry and business model. Generally, a lower percentage (less than 20%) suggests efficient cash flow management, while a higher percentage may indicate slower collections or higher credit risk.

Should I use total assets or current assets as the comparison metric?

Both are valid, but current assets provide a more liquid-focused view. Total assets give a broader picture of your overall financial position. Choose based on what you want to emphasize in your analysis.

How often should I calculate this percentage?

At least quarterly to monitor trends, but monthly is better for small businesses. Regular calculations help you track changes in your accounts receivable and overall financial health.

What does a high percentage of accounts receivable mean?

A high percentage may indicate strong sales but slower collections, higher credit risk, or inefficient cash flow management. It could also mean you're investing less in other assets.