Average Days Delinquent
What is Average Days Delinquent?
Average Days Delinquent(ADD) or delinquent days sales outstanding refers to the average number of days the invoices are delinquent or they are past-due. Average Days Delinquent is a crucial metric used to collections teams to analyze their customer’s delinquency trends.
Average Days Delinquent Calculation:
Average Days Delinquent is calculated using the 3-step formula:
DSO = (Average Accounts Receivable / Total Credit Sales) x Number of Days
Step 2: Enter Best Possible Days Sales Outstanding(BPDSO)
BPDSO = (Current Accounts Receivable / Annual Credit Sales) x 365 Days
Step 3: The formula for Average Days Delinquent is
ADD = DSO – BPDSO
Why Should You Analyze Average Days Delinquent?
Collections teams use Average Days Delinquent as an important indicator to evaluate their overall collections performance. Collectors often analyze DSO and ADD parallely to understand how fast they are able to convert invoice to cash.
High vs Low ADD: How to Interpret Average Days Delinquent?
- A high ADD indicates that the customers are taking more number of days to make payments. This might indicate a scope of improvement in the dunning efforts. Collectors could identify the various types of delinquent customers and they can send them proactive email reminders to recover the past-dues faster. Here are 6 strategies to handle customer delinquency in b2b collections.
- A low Average Days Delinquent means that the customers are paying faster.
Since credit and collection teams simultaneously evaluate DSO and ADD, let’s analyze a few instances that they might encounter while looking at the data:
- If DSO and ADD are both high or low – This means that both of the metrics are aligned. Either there is improvement or degradation of your dunning process.
- If DSO is low and ADD is high or vice versa – This doesn’t necessarily mean effective collection efforts. The improvement in DSO might be seasonal or because of modified credit terms.