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Late payments are a scourge on small businesses, siphoning away vital cash flow that you need to keep your company afloat.
We’ve offered a lot of advice on how you can get your customers to pay you, but normally there’s also something you can be doing to streamline your own accounts receivable process.
The first step in that streamlining process is to figure out exactly how inefficient your accounts receivable process is, and the best way of doing that is to use the accounts receivable days formula.
To help you get the best from your accounts receivable, we’ll be breaking down the accounts receivable day formula and how to use it.
At its simplest, accounts receivable days is a mathematical formula that lets you work out how long your accounts receivable takes to clear.
The easiest way to think of it is the number of days the average invoice will remain outstanding before payment is made.
Completing your accounts receivable days formula gives you insight into how good your business, or your accounts receivables team, is at collecting payment on outstanding invoices.
Knowing this information is vital to find ways to streamline and improve your accounts receivable process as part of your best practice.
The ‘best’ accounts receivable days ratio will depend entirely on your business, your customers, and your payment terms. It also depends on the goods or services you supply.
In short, you’ll have to figure that one out for yourself.
Having a very long account receivable days ratio can indicate that you’re very lenient with late-paying customers, or it could just be standard for your industry.
On the other hand, having a very short accounts receivable days ratio could be an indication of a great working relationship with your customers, or that you have a stringent approach to your credit policy that is potentially cutting off new business.
As a general rule, you’ll want to aim for around 25% longer than the payment date on your stated payment terms.
The good news is that the formula for working out your accounts receivable days is relatively simple:
To give you an example of how it works, if your company has £25,000 in outstanding invoices and total revenue of £75000 then the formula would look like this:
Accounts Receivable Days = (25000 / 75000) x 365 = 161.6
From that, we can see that it takes just under 162 days to collect each invoice. If the company in question is using the standard 30-day payment terms, it’s time for a full accounts receivable overhaul.
This is obviously an exaggerated example, but it serves to show how the formula works.
Your account receivable days is a watermark for how efficient your accounts receivable process is.
Having a ratio that is way past your standard payment terms is an indicator that you need to reassess how you approach your business's credit control.
Not keeping track of the efficiency of your accounts receivable can lead to unpaid invoices building up and cutting off your vital cash flow.
It should, however, not be looked at in a vacuum. You need to combine it with other metrics, such as your accounts receivable turnover ratio and your accounts receivable ageing reports to fully understand your accounts receivable health.
As an award-winning leader in the cloud-based credit control space, we’ve already helped thousands of customer just like you use a variety of ways to cut down on their accounts receivable days outstanding, including:
With Chaser’s outsourced credit control service, you can have a professional credit control specialist working for you, without all the hassle and expenditure of recruiting and training new staff.
Chaser has helped thousands of businesses just like you get paid 80 per cent of their outstanding invoices and we can help you too.
Take a look at our credit control and debt collection policy template for businesses to get started and book a demo with us to see how Chaser could benefit your business.