Accounts Receivable Days: Definition & How to Calculate

What is the accounts receivable days formula?

The accounts receivable days formula calculation can help businesses learn how long it takes to collect customer payments.

The formula is as follows:

‍Accounts receivable days =  Accounts receivable * Number of days / Total revenue

• Accounts receivable refers to the total amount of money the customers owe to the business for goods or services.
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• Total revenue is the revenue generated from sales made during a specific period.
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• The number of days is the time frame for the calculation (e.g., 30 days, 90 days, or 365 days).

The AR Days formula clearly shows how efficiently a business is collecting its receivables. A lower AR Days value indicates a fast collection of customer payments, but in contrast, a higher value suggests there are customer payment delays within the process.

Why is the accounts receivable days calculation  important?

Calculating the accounts receivable turnover in days is important for your business due to several reasons, such as:

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Reviewing cash flow
‍You can see the impact on cash flow with AR Days, as the longer it takes to collect outstanding customer payments, the more strain it places on your company's finances. Monitoring the AR Days value is good as it makes it easier to identify delays in the payment collection process and enables you to take any necessary action to manage your cash flow better.

Evaluating credit policy
‍Businesses can evaluate the effectiveness of their credit policies using the AR Days value. For instance, if your AR Days are consistently high, it may suggest that your company’s credit terms aren’t strict enough or that your customers are not sticking to the payment deadlines. Sample management reports can compare your performance against a chosen target.

Assessing financial health
‍AR Days can signal how well your company's financial health is doing. Simply put, if your organisation has a higher AR Days value, it may imply potential cash flow issues and suggest improvements are needed in the accounts receivable collection. On the other hand, a low AR Days value means that your receivables management process is going smoothly.

Forecasting revenue
‍The AR Days number is necessary for budgeting and financial planning as it can help you analyse, evaluate, and better predict your cash inflows. This can be made more efficient with the addition of business reporting software, which can automate your processes and provide accurate forecasts.  

What is a good accounts receivable days number?

A good number of accounts receivable days outstanding truly depends on the organisation’s industry, business model and credit terms. Nevertheless, as a general rule, it's best to keep in mind that a lower AR Days value is preferable, as it shows faster accounts receivable turnover in days collection and that there is satisfactory cash flow management.

Consider some of the industry benchmarks below:

• Retail and e-commerce: Due to faster payment cycles, these industries typically have lower AR Days, often between 0 to 10 days.
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• Manufacturing: Depending on the complexity of the supply chain, the AR Days in manufacturing can range from 30 to 60 days.
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• Services: Professional services (such as consulting or IT) may have AR Days between 30 to 90 days, as customers often pay after project completion.
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• Wholesale and distribution: These industries often see AR Days between 45 to 90 days due to extended credit terms offered to buyers.

These benchmarks can be a starting point, but your business should achieve an AR Days number that meets and aligns with your operational needs. You should also consider industry standards, as that can help your business identify areas for improvement and strengthen your firm as a competitor.

How to calculate accounts receivable days?

Calculating accounts receivable turnover in days is a simple process when you have the necessary data. Let’s break it down step by step:

• Determine accounts receivable: Identify the total amount of outstanding receivables at the end of the period.
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• Calculate total revenue: Sum up all sales made during the same period.
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• Choose the time frame: Decide the number of days for the calculation (e.g., 30, 90, or 365 days).
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• Apply the formula: Insert the numbers into the account receivable days formula.

Example of accounts receivable days calculation

For example, let's say your company has the following data to calculate its AR Days:

Accounts receivable: $10,000

Total revenue: $100,000

Number of days: 90 days

Using the formula as below:

AR Days = 10,000 * 90/100,000

This means that it takes you an average of 9 days to collect outstanding payments from your customers.  

What does the accounts receivable days tell us about the business?

Days sales in accounts receivable offer valuable insights into a company's financial operations. The impact of accounts receivable days is the following: 

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Effect on working capital: A high AR days value ties up working capital in receivables, which means it can limit the funds available for other business operations. Hence, it is advisable to reduce your AR Days, as that can free up capital for investments or other expenses. For example, imagine your company has $100,000 in receivables, and you lowered your AR Days value from 45 to just 30 days. In that scenario, your company can free up a significant portion of that capital for other uses, such as inventory expansion or investment in other growth opportunities.

Effect on cash flow: Firms with delayed payment collection could face cash flow shortages, making it challenging to meet financial obligations. For instance, if your company has a high AR Days value, you might struggle to pay your suppliers on time, which can strain your business relationships and cause disruptions. However, a company with a low AR Days value can more easily keep a healthy cash flow and stay on top of financial commitments.  

Effect on revenue forecasting: Knowing your AR Days value allows you to forecast cash inflows from revenue, and therefore the cash your business has available to pay for invest in other things, which can help with long-term financial planning and stability.

How to reduce your accounts receivable days ratio

The following are some valuable techniques to put into practice:

1. Implement stricter payment terms
   Consider notifying your customers upfront about stricter payment conditions, such as tight credit policies, shorter payment periods (e.g., from 60 days to 30 days), or fees for late payments. For instance, a business could enforce a policy where invoices are payable within 15 days instead of 30 days, with a 1.5% penalty applied to any payments received after the specified due date. This would promote quicker payments and offer an incentive for clients to strictly adhere to the new terms.
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2. Incentivise early payments
   ‍Another method would be to offer discounts or rewards to customers who settle their invoices ahead of time. Let's say we provide a 2% discount to customers who make the payment within 10 days. This strategy would encourage faster payments, significantly reduce the firm's AR Days, and improve cash flow. Plus, this approach can help build stronger customer relationships and create more opportunities for them to save their money.  
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3. Collect proactively
   Before invoices are due, promptly send follow-up reminders to customers to avoid overdue payments. For instance, a company could set up an automated email system that sends reminders to customers a few days before the invoice is due or take another extra step and call the customer directly to remind them of the payment needed. This proactive approach not only reduces the number of AR Days for the firm but can also inherently nurture better customer relationships. To simplify this process, it might be worthwhile to use automated tools to ensure no invoices are slipping through the cracks.  
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4. Automate the accounts receivable process
   Following up on the point above, accounts receivable automation software can be an incredible tool to boost collection efficiency. Some of the most beneficial features an automated system can provide are generating and sending invoices instantly, tracking payments in real-time and sending prompt reminders to customers about their invoice status. These elements can help reduce the risk of errors and make sure the receivable process is as efficient as possible.  

Tracking accounts receivable days in Fathom

Automation transforms how businesses manage their accounts receivable processes, much like our management reporting software.

What is management reporting software, and how does it help track AR Days effectively? It is a powerful tool we've designed to simplify and improve the process of creating, analysing, and sharing financial and operational reports.  

This can be made especially valuable for tracking AR Days efficiently. With its financial reporting software capabilities, our mission is to help businesses ease their reporting processes, gain deeper insights into their performance, and help you communicate meaningful results to your stakeholders.

Our Fathom management reporting solution includes features such as automated data integration, customisable reports, and easy platform collaboration that make tracking and analysing AR Days more manageable and more efficient. Overall, businesses can find opportunities to improve cash flow and communicate financial performance clearly.

Final thoughts

Keeping track of accounts receivable days is crucial for any organisation’s financial health. This metric shows how well a company collects payments from customers and helps manage cash flow and credit policies. By calculating how long it takes to receive payments and applying some useful strategies, businesses can spot areas where they can improve, better predict cash coming in, and make informed decisions to improve their financial processes. Ultimately, this approach can help secure smoother operations and greater financial stability for your business.

Interested in our KPI Tracking Software?  

KPI tracking software is essential for businesses looking to improve their understanding of performance. By monitoring Key Performance Indicators (KPIs) and relevant metrics, this software empowers organizations to gather valuable insights and focus on the metrics that truly matter to their business goals.