What is the Accounts Receivable Days Formula?

 It is invaluable for evaluating the business's effectiveness in managing short-term collections, offering vital insights for financial analysis. By analysing this metric, companies gain insights into their cash flow management and can make informed decisions. 

In this article, we will explain the significance of the receivables days formula and its implications for businesses striving for fiscal prowess.

Calculating Accounts Receivable Days Step-by-Step

The AR days metric, also known as days sales outstanding (DSO), measures the duration between the date of a credit sale and the date when cash is collected. We provide its step-by-step calculations below:

1. Begin by selecting a specific time period for analysis, typically a month or a quarter.

You decide the timeframe for calculating DSO. Smaller businesses may prefer quarterly calculations, while those with frequent credit sales should calculate AR days monthly.

2. Calculate the beginning accounts receivable total for the period.

This data is in a balance sheet generated on the period's initial date. For example, to calculate DSO for Q1 2024, run a balance sheet as of Jan. 1, 2024, to find the starting accounts receivable balance.

3. Calculate ending accounts receivable total for the period.

To get your ending accounts receivable balance, follow the same process but generate a balance sheet report as of March 31, 2024.

4. Determine average accounts receivable for the period.

It's a simple calculation. Take the beginning and ending accounts receivable balances for your chosen period. For instance, if your Jan. 1, 2024, balance was $20,000 and your ending balance was $30,000, the average is calculated as ($20,000 + $30,000) ÷ 2 = $25,000, revealing your average accounts receivable for the first quarter.

5. Calculate total credit sales for the period.

This calculation can be complex if you don't separate cash sales. If you do, simply find your total sales for the period, deducting returns and adjustments. If cash sales aren't automatically tracked, subtract those too. For instance, if your credit sales were $77,000 in Q1 2024, with returns of $2,500, your total sales would be $74,500.

6. Determine the number of days in the specified period.

When calculating DSO for the month, employ the total days. However, for quarterly DSO, sum up the days in each month.

7. Calculate DSO

With the data collected, you can now calculate days sales outstanding (DSO) using the formula:

($25,000 average accounts receivable ÷ $74,500 credit sales) x number of days 

Accounts Receivable Days Calculation Example

A shoe business recorded $150,000 in sales for a year, beginning with $20,000 in accounts receivable and ending with $30,000. 

The average accounts receivable for the year is $25,000: 

[$20,000 + $30,000 = $50,000] ÷ 2 = $25,000 

This average AR as a proportion of net revenue is 16%: 

$25,000 ÷ $150,000 = 0.16 

Using this figure, we calculate accounts receivable days:

0.16 x 365 = 58.4 

Thus, on average, the business takes about 58 days to collect outstanding payments. The calculation varies depending on the period's duration: for one month, it's 30 days; for a quarter (three months), it's 90 days (3 x 30 days = 90 days).

Accounts Receivable Days Forecast Example

Forecasting accounts receivable involves predicting customers' future debts within a set timeframe. It provides financial insight for planning ahead, aiding in cash flow management and strategic decision-making. Accurate forecasting guides investments, expansions, and debt repayment, ensuring smooth business operations and growth.

We can now forecast our accounts receivable with DSO and Sales Forecast data. Given a sales forecast of $170,000, here's the formula for our accounts receivable forecast:

Accounts Receivable Forecast = Days Sales Outstanding x (Sales Forecast / Time Period)

AR Forecast = 58 days x ($170,000/365 days)

AR Forecast = $27,000

This means that with a DSO of 58 Days and last year's $150,000 sales, the company anticipates growth, forecasting $170,000 in sales this year. With this, their AR forecast for next year is $27,000, compared to $25,000 last year. By relying on historical data and insights from sales and marketing teams, the company has a precise accounts receivable forecast, avoiding guesswork.

Contact Us for Accurate Accounts Receivables Days Calculations

Accounts Receivable Days Formula

The formula to calculate the AR days looks like this:

AR Days = (Average Accounts Receivable ÷ Revenue) × Number of Days

• Average Accounts Receivable is calculated by adding the beginning and ending accounts receivable balances and dividing by two.
• Revenue, or "net revenue," reflects the total monetary value from selling products and services to customers within a specified period after accounting for discounts, returns, and sales allowances.

How to Interpret Receivable Days

Accounts receivable days is a critical business metric measuring credit policy effectiveness. Lower days signify efficient collections, reflecting strong credit policies and streamlined bill processes - this metric aids cash flow projections for meeting payroll and tax obligations. Low accounts receivable days ensure effective payment receipt, strengthening cash flow and meeting financial commitments.

Accounts receivable days varies widely across industries and businesses, usually falling between 30 and 70 days. These figures depend on industry standards, credit policies, collection methods, market dynamics, and customer demographics. If a business exceeds industry norms for accounts receivable days, it should consider internal policy improvements.

Businesses often use historical comparisons to analyse accounts receivable days, identifying trends. A decrease from one year to the next may suggest improved collections, not due to major credit policy changes. Conversely, an increase, without significant policy shifts, may highlight the need for process enhancements. Comparing multiple periods helps identify patterns, historical trends, and seasonal effects.

How Can a Business Improve AR Days?

Below are some tactics for companies to improve their AR Days:

• Outsourcing accounts receivable allows negotiating a reduction of 10, 20, or even more than 30 days in a company's DSO, established as a specific business goal within the contract with the AR service provider. This directly results in increased cash flow for essential business operations.
• Clear, upfront communication of payment terms and expectations can prevent confusion and ensure prompt payments. This involves specifying due dates, detailing late payment penalties, and offering diverse payment methods.
• Prompt and accurate invoicing motivates timely payments by informing customers of their balances. Error-free, easy-to-understand invoices are crucial for this process.
• Regularly following up on invoices is vital for reducing AR Days. This involves reminding customers of upcoming or overdue payments and promptly addressing disputes or discrepancies.
• Simplifying payment methods enhances customer convenience. This involves providing online, automatic, and mobile payment options.

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Author: Giles Goodman, Commercial Intervention Officer OAR
Giles Goodman is the definitive expert in cross-border commercial debt collection, mediation, legal recovery, and accounts receivable. Based in London, his 25 years of experience provide a global perspective on preventing defaults and efficiently managing overdue accounts. Giles’s insights and analyses empower business owners worldwide with strategic approaches to financial management and recovery.

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