Accounts receivable days: Definition and formula

How long does it take your business to collect a payment from a customer after it makes a sale?

The answer to this question is a financial metric known as accounts receivable days, and it's a critical focus point for AR professionals.

In this guide, we’ll explore the importance of tracking AR days and its role in financial management. We’ll explain how to calculate it, provide a formula and example, and dive into some strategies for improving your AR days number.

What is accounts receivable days?

Accounts receivable days (AR days) is a financial metric that tells you the average number of days it takes your company to collect payment from its customers after a sale is made.

It's a reflection of the efficiency of your organization's credit and collections process.

The importance of tracking accounts receivable days 

There are three compelling reasons why finance leaders track AR days:

1. Managing cash flow with accounts receivable days

Accounts receivable days directly impact a company’s cash flow.

As a metric, AR days indicate how quickly credit sales are converted to cash, something that is crucial for maintaining liquidity and servicing liabilities.

How accounts receivable days impact cash flow 

Shorter AR days mean faster cash inflow. This allows your business to cover expenses, invest in growth, and reduce your reliance on debt and other forms of external financing.

If your company is quick to collect payments, this generally leads to:

• Better liquidity
• Lower financing costs
• More operational flexibility 

Conversely, longer AR days can strain liquidity and make it harder for your business to meet its operational costs.

When companies are slow to collect on credit sales, it can lead to:

• Delayed payments to vendors and strained relationships
• Increased borrowing needs and interest expense
• Reduce investment opportunities 
• Higher bad debt risk

2. Optimizing working capital through effective accounts receivable management 

Efficient and effective management of accounts receivable ensures that cash isn’t tied up in unpaid invoices. This frees up working capital for other critical needs, such as paying down debt or investing in growth opportunities.

3. Measuring the efficiency of accounts receivable collections

The AR days metrics serve as a benchmark for evaluating how effective your copmany’s credit policies are.

High AR days values indicate that the company has credit policies that are too lenient or struggles to collect payments from customers. It may highlight potential inefficiencies, such as delayed invoicing or lax payment follow-up procedures.

How to calculate accounts receivable days

Formula for accounts receivable days 

The formula for calculating accounts receivable days is pretty straightforward:

Accounts receivable days = (Average accounts receivable / Revenue) X Number of days

Here’s a guide to the three components you’ll require:

• Average Accounts Receivable: The average balance of AR during the period.
• Revenue: Total sales or revenue during the same period.
• Number of Days: The length of the period being measured (e.g., 365 days for a year).

A step-by-step guide to calculating accounts receivable days 

Let’s walk through the process of calculating AR days with an example.

Imagine a company has the following figures:

• Beginning AR: $50,000
• Ending AR: $70,000
• Revenue: $800,000
• Period: 365 days

First, we calculate the average accounts receivable for the period by adding the Beginning AR and Ending AR figures, and dividing that by two:

Average AR = ($50,000 + $70,000) / 2 = $60,000

Then, we apply the AR days formula:

‍AR days = ($60,000 / $800,000) X 365 = 27.275 days

What we can draw from this figure is that on average, this company takes about 27 days to collect payments from its customers.

Analyzing and interpreting accounts receivable days 

Once you’ve calculated your own AR days figure, you’ll probably want to interpret and analyze that number to understand what it says about your organization’s financial health.

Here are some key points in analyzing and interpreting AR days:

• High AR days mean it takes longer for customers to pay. Low AR days mean customers pay faster.
• High AR days might signal lenient credit terms, collection inefficiency, or potential cash flow issues. Low AR days suggest efficient payment collection and strong cash flow, though it may indicate that your credit policies are strict, which could be prohibiting sales.
• High AR days can, in extreme cases, lead to bad debts.

It’s important, however, to interpret accounts receivable days in context. For instance, you should consider:

• Your business model. High AR days may be more acceptable in industries that have longer sales cycles.
• Seasonality. Fluctuations may occur due to seasonal trends.
• Other metrics. Review and analyze AR days alongside other important financial metrics like current ratio, quick ratio, day sales outstanding, or working capital ratio to gain a better understanding of financial health.

Identifying trends and benchmarking against industry standards 

It’s natural to ask the question:

What is a good accounts receivable days ratio? 

The thing is, what is “good” can vary significantly by industry.

For instance:

• In consumer-focused industries, AR days are typically low (15-30 days) as most transactions are paid upfront.
• In B2B sectors, AR days tend to be higher (30-90 days) due to standard credit terms.
• For custom or project-based businesses, AR days may exceed 90 days, because of milestone-based payments or contract terms.

While 80 days might be a large AR days number for an e-commerce company, this might be completely within expectation for a large construction firm.

So, it’s a good idea to find benchmarks that are relevant in your own industry. You can check out financial reports from competitors and use industry reports from organizations like IBISWorld, Statista to identify the data that is most relevant to your business. 

It’s also also to pay attention to trends in your own business to understand how your AR days metric changes over time.

For example, you might measure AR days on a monthly, quarterly, or even annual basis, comparing current against past figures, then. You’ll investigate spikes or declines in the figure to identify potential causes.

If AR days are increasing, this might point to lax credit policies or deteriorating customer payment behavior, for example.

Analyzing the impact of changes in accounts receivable days 

So, what does it mean if accounts receivable days are changing? What is the real-world impact of rising or falling AR days? Let’s explore.

Rising AR days

If your AR days metric is increasing, this by and large has a negative impact. It can strain cash flow and working capital, increase reliance on external financing, make it harder to pay your own liabilities, and can even lead to bad debts.

If AR days are increasing, mitigation strategies to consider include

• Tightening credit policies
• Improving your collections process
• Offering early payment discounts 

Declining AR days

If, on the other hand, AR days are declining, this is generally considered a positive thing.

Falling AR days has a positive impact, freeing up cash for operational needs and investments and reducing your need to rely on external funding, which may reduce your interest expense.

It's important to note, however, that if AR days are declining sharply, this could indicate overly restrictive credit policies, which may be harming sales. 

Factors that affect accounts receivable days 

What leads to higher or lower AR days metrics?

There are six main factors that impact what your accounts receivable days might look like:

1. Credit policies. Stricter terms tend to reduce AR days, while more lenient policies may increase them.
2. Customer payment behavior. The payment habits of your key clients significantly impact AR days. Customers that purchase more, and therefore receive more invoices, can skew AR days if they take much longer to pay than others.
3. Industry norms. Standard payment terms can differ significantly across industries.
4. Economic conditions. During tough economic times, AR days may increase as customers are slower to pay.
5. Internal efficiency. Timely invoicing, effective follow-ups, and robust collection systems can all contribute toward reducing AR days.
6. Technology. Automated invoicing and payment reminders can expedite collections and reduce your AR days metric.

Strategies to improve accounts receivable days 

You’ve calculated your AR days, put a strategy in place for tracking changes, and now you’d like to put some processes in place.

Here are a few ideas you can implement right now.

Streamline invoicing and payment processes

By adopting more efficient invoicing and payment systems, you can reduce delays and help ensure customers pay on time. You can:

• Issue invoices immediately after a sale is completed
• Implement a double-check process to avoid invoice disputes
• Offer multiple payment options to make it easier for customers to pay
• Use clear language on invoices to ensure payment terms are understood
• Follow up regularly, including automated reminders before and after payment due dates

Leverage technology to automate collection

Accounts receivable automation can reduce manual effort and improve consistency.

Here are a few ways you can use this powerful tech to improve AR days;

• Adopt automated invoices
• Set up an automatic payment reminder
• Implement automated collecting tracking systems
• Offer an online customer portal where buyers can see outstanding invoices and payment history
• Use recurring billing to manage subscription customers 

Offer payment incentives

You can encourage faster payments from credit customers by offering financial incentives.

For instance, you might offer a small discount for early payments or introduce a penalty for late payments.

Tighten credit policies

If your AR days are excessively high, it might be a sign that your credit policies are a little too relaxed.

Some ways to tighten up and reduce the risk of late payments include:

• Offering shorter payment terms (e.g., net 15 instead of net 30) for customers with a history of late payments.
• Performing credit checks on new customers before extending payment terms
• Restricting trade credit to customers with poor payment histories or require that they pay an upfront deposit 

Improve customer communication 

One of the best ways to promote more consistent and timely payments is to build strong relationships with your customers. You can:

• Design a clear and engaging onboarding process
• Implement regular checks-ins to address any payment concerns or issues prompt
• Build a dedicated team or point of contact who is responsible for managing accounts receivable 

Monitor and analyze accounts receivable 

Regular tracking of both AR days and accounts receivable aging reports is an important practice for identifying problem areas and addressing them proactively, allowing your team to prioritize collections for the most overdue accounts.

Outsource collections

If you’re dealing with persistently overdue accounts, it might be worth considering outsourcing your collections to a third-party agency.

This can be a cost-effective way to collect on overdue accounts while freeing up your team to focus on core activities.

Improve AR days with BILL 

Reducing your accounts receivable days metric is an important step in improving cash flow, reducing your reliance on debt, and ensuring your overall accounts receivable process runs smoothly.

BILL, our financial operations platform, is equipped with powerful features to help you reduce AR days and improve financial health, such as:

• Automated invoicing and follow ups
• Easy cash flow forecasting 
• Multiply payment methods to help customer pay faster