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What is Accounts Receivable Days? [Formula, Calculation & Examples]

10 May, 2022
4min read
Patrick Petti, AVP, Value Optimization
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What you'll learn

  • What is Accounts Receivable days and how to calculate it?
  • What is a good Accounts Receivable days number?
  • How to make the most of the AR days metric?
  • 5 tips for businesses to reduce their Accounts Receivable days?
CONTENT
What is a good account receivable days number?
How to calculate accounts receivable days with an example?
How to make the most of the accounts receivable days metric?
How can a business reduce its accounts receivable days?
Conclusion
FAQs
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Accounts Receivable Days (AR days) is the average time a customer takes to pay back a business for products or services purchased. It helps companies estimate their cash flow and plan for short-term future expenses. By measuring the AR days, a company can identify whether its credit and collection processes are efficient or have room for improvement.

For example, if a considerable number of customers default on their payments but pay eventually, the collection process needs to be more proactive. However, if the business’s bad debt is piling up, the credit process needs to be worked.

What is a good account receivable days number?

Accounts receivable days is a dynamic metric. It would not be correct to define it as a single number because there are many factors involved. A good or bad AR days number will depend on the industry, the company’s payment terms, and its past trends.

For example, nearly 50% of construction and oil companies get late payments, which leads to significantly higher AR days number when compared to retail or service companies. Thus, you cannot compare the AR days of two businesses from different industry segments.

A business’s payment terms also affect how long customers take to pay. If a company offers a 30-day credit period, then an AR day number within 37—38 days (25% above the limit) signifies some room for improvement. On the other hand, if the AR days are much lower than the credit period, the credit terms might be too strict. Businesses can lose out on potential customers in such scenarios.

How to calculate accounts receivable days with an example?

Businesses can calculate accounts receivable days by multiplying the number of days in a year with the ratio of a company’s accounts receivable and total annual revenue.

Accounts Receivable Days = (Accounts Receivable/Total Revenue)*365

Example

Company A has made a revenue of $5 million at the end of a year and has pending accounts receivable of $500,000.
Total Revenue = $5,000,000
Accounts Receivable = $500,000
Accounts Receivable Days = (Accounts Receivable/Total Revenue)*365
= (500,000/5,000,000)*365
= 0.1 * 365 = 36.5 days

So, the AR days for company A is 36.5 days. To interpret this metric, we will need details on the company’s industry and past data.

How to make the most of the accounts receivable days metric?

Analyzing a company’s AR days gives a detailed insight into its credit and collection process efficiency. If the metric is tracked and mapped to a chart, you can learn about the company’s ability to collect payments and if it is affected by any particular pattern.

If there is a steady increase in the average time to receive payments, it might be necessary for a business to tighten its credit terms. However, if there is a continuous decline, lenient payment terms can be introduced to attract more customers. So, to make the most of AR days metric, it’s essential to pair it with other data.

How can a business reduce its accounts receivable days?

reduce accounts receivable days

Maintaining a good AR day number is vital for the growth of any business. It should neither be too high nor too low to have the perfect balance between healthy cash flow and ample business opportunities. Let’s look at how businesses can reduce their accounts receivable days.

1) Implement stricter payment terms

When you have stringent credit terms, it could affect business opportunities with new customers, but it’s a great way to reduce AR days. You can impose late payment charges to payment terms to make the process effective and prevent customers from defaulting on their due date.

2) Incentivize early payments

Offer a small discount to customers that pay with cash or within their credit period to bring down AR days. It may not work for every customer, but you can motivate businesses with healthy cash flow that still delay payments till the last day without any reason to pay earlier.

3) Collect proactively

Businesses must identify accounts that are at risk and reach out to them before the due date. It will help cut down bad debt and reduce AR days simultaneously. If a business wants to be proactive in its collections, it can have strict rules to identify accounts that show any signs of delaying payments.

4) Make it easy to pay

Sometimes, a lack of convenient payment methods is all that stops a customer from paying on time. By adding multiple payment options like credit cards, debit cards, electronic fund transfers, and checks, businesses can reduce the friction of payments. It can therefore reduce accounts receivable days of a business.

5) Automate the accounts receivable process

Automate credit and collections processes to make them more efficient and help reduce the AR days. A report from PYMNTS suggests that 88% of businesses that have automated their accounts receivable processes have seen a significant reduction in days sales outstanding (DSO or AR days).

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Conclusion

Accounts receivable days is a critical metric for businesses to track and maintain, but doing it manually can be difficult and time-consuming. Therefore automating the AR processes can be a simple way to improve the metric. HighRadius offers credit and collection solutions that will allow your business to track credit risk in real-time and enable up to 75% faster AR recovery.

FAQs

1) How to calculate accounts receivable days on hand?

One can calculate the accounts receivable days of a business by dividing the pending AR with the revenue during a fixed period and multiplying it by the number of days at the time.

2) What do high receivable days mean?

A high receivable day means that a company is inefficient in its collection processes and its payment terms might be too lenient. It could result in poor cash flow and hinder the growth of a business.

3) What causes an increase in accounts receivable days?

A business notes an increase in AR days in three scenarios. They are:

  • Rising AR and reducing annual revenue
  • Constant AR and reducing annual revenue
  • Rising AR and constant annual revenue

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