Managing your accounts receivable efficiently is crucial for ensuring the financial health of your business. One key metric used in the evaluation of a company’s ability to collect money owed by customers is accounts receivable days. In this article, we will walk you through the steps needed to calculate accounts receivable days, allowing you to better assess your organization’s financial performance.

What are Accounts Receivable Days?

Accounts receivable days, also known as days sales outstanding (DSO), represent the average number of days it takes for a company to collect payment from its customers after a sale has been made. This metric is an indicator of the effectiveness of a company’s credit and collection policies, as well as its cash flow management.

Why is it Important?

A lower number of accounts receivable days generally indicates that a company is more efficient at collecting payments from its customers, thereby reducing financing costs and improving cash flow. Conversely, a higher number suggests potential difficulties in collecting payments, increasing the risk of bad debts and negatively impacting overall business performance.

Calculating Accounts Receivable Days

To calculate accounts receivable days, you will need two essential data points: accounts receivable (AR) balance and net credit sales. The formula for calculating AR days is as follows:

Accounts Receivable Days = (Average Accounts Receivable / Net Credit Sales) x Number of Days in Period

1. Average Accounts Receivable: To find the average accounts receivable balance, add the beginning and ending AR balances and divide by 2.

Average Accounts Receivable = (Beginning AR + Ending AR) / 2

2. Net Credit Sales: You can find this figure on your company’s income statement or calculate it by subtracting sales returns and allowances from total sales.

3. Number of Days in Period: Depending on how you want to evaluate your company’s performance, you may choose to use 30, 90, or 365 days as the number of days in the period.

After calculating the average accounts receivable and net credit sales, plug them into the formula to determine your accounts receivable days.

Example:

Let’s say Company XYZ’s beginning AR balance is $45,000; the ending AR balance is $55,000; and net credit sales for the period amount to $500,000. The number of days in the period is 30.

First, we calculate the average accounts receivable:

Average Accounts Receivable = ($45,000 + $55,000) / 2 = $50,000

Next, we calculate accounts receivable days:

Accounts Receivable Days = ($50,000 / $500,000) x 30 = 3

In this case, Company XYZ takes an average of three days to collect its accounts receivable.

Conclusion

Understanding and regularly calculating your company’s accounts receivable days is essential for effectively managing cash flow and ensuring the success of your business. By tracking this metric over time and comparing it to industry benchmarks, you can identify areas for improvement in your credit management policies and make informed decisions that positively impact your company’s financial performance.