Accounts Receivable Days

Accounts receivable days, or accounts receivable days outstanding (ARDO), is the number of days on average it takes for a company to collect on its invoices.

The measurement has two clear purposes:

It measures efficiency. In general, the faster a company can collect its receivables, the more efficient its A/R management. While lower accounts receivable days typically means the company is effective at collecting its accounts receivables, it also depends on factors such as the industry, the time period used in the calculation (quarter versus biannual) and the management of your collections process.

It helps ensure accurate forecasting. With an accurate understanding of your cash flow, you can make better investment decisions and more easily manage financial commitments such as paying employees and suppliers on time.

The Accounts Receivable Days Formula

The formula for accounts receivable days is:

Accounts receivable days = [Average AR ] x Days

Net Revenue

The accounts receivables days formula is composed of two metrics.

Average AR: This is the sum of the accounts receivables divided by the time period (e.g. biannual or quarterly).

Net Revenue: The gross revenue minus the company’s expenses, credit and allowances.

For example, if a manufacturing business has $2 million in annual sales and calculates it per quarter, the average AR would be: $2,000,000 / 4 = $500,000

You would then divide $500,000 by the net revenue (in this example we’ll say the company was left with $3,200,000 in net revenue after deducting expenses and discounts) and multiply it by 365, since most companies calculate their accounts receivables days for the year.

[$500,000 / $3,225,000] x 365 = 56.6 accounts receivables days

This calculation means that it takes the manufacturing business 56.6 days to collect on outstanding invoices.

What is a good accounts receivable days ratio?

It’s difficult to say what the best accounts receivable days ratio is since it depends on a variety of factors. However, the average accounts receivable days is typically between 30 and 70, with 30 considered low and 50-70 considered high.

Factors Affecting Accounts Receivable Days

The factors that affect your accounts receivable days ratio are a combination of those that are and are not under your control.

For example:

The number of days in the average A/R period. Is the time period you use to calculate average A/R based on biannual, annual, or quarterly sales? Changing the time period with which you calculate average A/R can significantly affect your accounts receivables days calculation.

The industry. Industries such as manufacturing and construction have longer than average accounts receivable days, while others, such as retail, have shorter ones. This is often due to complex billing and payment processes, longer production and delivery times and those whose customers are governmental agencies or organizations in the public sector.

Your credit terms. Your company may decide to be more generous with its credit terms for customers that pose low risk of bad debt. However, it comes at the cost of a higher accounts receivable days ratio, and should be weighed against the risks of issues with cash flow. Late payment penalties can motivate customers to pay on time, and you can also take a proactive approach to prevent these customers from paying late on their invoices by incentivizing early payments.
Your collections process. If you have bottlenecks in your collections process, such as ineffective A/R teams or individual collectors who are not productive, complex payment processes or ineffective communication between clients and your company, you’ll take longer to collect invoices. Streamlining your company’s collections and A/R process will make it easier to collect invoices.

How Gaviti Helps You in Calculating Accounts Receivables Days

You can’t usually control complex payment processes or longer production times that influence the length of your accounts receivable days, but your collections process and strategy is under your control. Gaviiti’s A/R management and automation platform helps you take control over this process and make it as efficient as possible by eliminating manual processes and automating the entire A/R process, from invoice distribution to collections analytics, credit monitoring and cash application.

Its automated A/R management and automation module includes:

Single source of truth for A/R performance. Seamlessly connect with your ERP systems, consolidating your A/R data into a single, centralized view. With a unified view of your A/R, you gain real-time visibility into outstanding balances, customer payment history, and collections status.

Automated collections actions. Take a proactive approach by defining and automating collections actions based on predefined criteria, such as due date, aging of invoices, payment history, or credit terms. Automate reminders, internal or external escalations, and other collections actions, streamlining your collections process.

Intelligent prioritization. Minimize bad debt and maximize recovery by leveraging intelligent algorithms to prioritize collections activities based on factors such as payment history, customer creditworthiness, and the amount outstanding. Focus on high-value and high-risk accounts to optimize collections efforts and accelerate cash inflows.

Streamlined customer interactions. Get a comprehensive system to capture and record customer interactions, including calls, emails, and notes. With this at your A/R team’s fingertips, they’ll have meaningful conversations with customers, resolve disputes, and build stronger relationships.

Want to learn more about how Gaviti can help you streamline the entire A/R process? Speak to a Specialist!