Does your business deal with a culture of late payments? When you’ve got outstanding invoices stuck on your balance sheet and cash flow problems are making it harder and harder to pay your bills and keep your business afloat, streamlining your accounts receivable process could be a great idea.
But before you do that, it’s important to work out exactly how efficient (or inefficient) your accounts receivable really is. That’s where the accounts receivable days formula comes in. Find out everything you need to know about the accounts receivable days calculation with our comprehensive guide.
Accounts receivable days explained
Accounts receivable days is a formula that helps you work out how long it takes to clear your accounts receivable. In other words, it’s the number of days that an invoice will remain outstanding before it’s collected. The accounts receivable days ratio is an excellent way to determine how effective your business is at collecting short-term payments, making it a great tool to add to your financial analysis arsenal.
What is a good accounts receivable days ratio?
On the whole, there isn’t a universally applicable figure for a “good” accounts receivable days ratio. This is because accounts receivable days vary significantly from industry to industry, as do underlying payment terms. For example, companies operating within the oil and gas industry are likely to have a much higher accounts receivable days ratio than a business in the technology space.
Having said that, if your accounts receivable days calculation is more than 25% above the standard payment terms stated in your invoice, optimising your accounts receivable could be a good idea. At the same time, you don’t necessarily want to have an accounts receivable days ratio that’s too close to your stated payment terms, as that may indicate that your company’s credit policy is too harsh, and you’re losing out on potential income.
How to calculate accounts receivable days
Want to know how to calculate accounts receivable days? It’s a relatively basic formula:
Accounts Receivable Days = (Accounts Receivable / Revenue) x 365
Let’s look at an example to see how this works in practice.
Imagine Company A has a total of $120,000 in their accounts receivable, along with an annual revenue of $800,000. Then, you can use the accounts receivable days formula to work out your total as follows:
Accounts Receivable Days = (120,000 / 800,000) x 365 = 54.75
This tells us that Company A takes just under 55 days to collect a typical invoice. If we assume that the payment terms outlined in Company A’s invoice were net 30, a significant amount of time has elapsed between the payment due date and the receipt of payment, indicating that Company A could benefit from overhauling its accounts receivable processes.
Why is the accounts receivable days calculation important?
Understanding the accounts receivable days ratio is a great way to gain a deeper insight into the overall effectiveness of your company’s credit and collection efforts. You can also use the accounts receivable days calculation to track trends in accounts receivable, month after month. This can help you chart improvements in your company’s ability to collect on outstanding invoices.
However, it’s important to remember that the accounts receivable days formula is an overall measurement of accounts receivable, rather than a customer-specific measurement. As a result, it’s always a good idea to supplement this metric with other reports, such as accounts receivable aging (a report listing unpaid invoices and unused credit memos by date).
How to reduce your accounts receivable days ratio
The best way to reduce the amount of time it takes your business to collect outstanding invoices is to optimize accounts receivable. There are many ways to do this, but one of the most effective is to offer ACH debit, which enables you to take payment directly from your customer’s account whenever payment is due. This lets you invoice significantly faster and removes the lags associated with a sluggish accounts receivable process.
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