Accounts Receivable Days Formula: Definition, Formula, Impact, and Ways to Improve it

“What gets measured gets improved”

Peter Drucker

(Austrian American Educator)

This quote works wonders in the corporate field where stats gauge the sustainability of a business. 

Considering the whole supply and value chain, finances are the umbilical cord of the business, and gauging it through different parameters is an imperative exercise. To maintain financial stability, businesses often rely on business accounting services to manage their financial operations efficiently.

Out of all such parameters, “Accounts Receivable Days” is a significant criterion to assess the feasibility of a business. 

However, deriving it requires a holistic understanding of the accounts receivable days formula and other adjoining factors. 

To bring a clearer picture of this concept, here is a comprehensive account covering every dimension and facet circumambient to it.

What are Accounts Receivable Days?

It is a general parameter to estimate how long a firm takes to receive payment from the customer after the sale of a product or service has been completed. 

In simple terms, it is the period when the invoice remains outstanding and has not been paid yet, and mirrors the condition of credit and collection of the firm. To ensure a steady cash flow, businesses must also manage their accounts payable services effectively, reducing delays in outgoing payments.

Accounts Receivable Days’ is a significant criterion to measure the effectiveness of a business by analyzing its capability to collect short-term payments. It also facilitates checking the menace of debt, which if not managed, requires certain strategies to control, such as corporate debt restructuring. 

This particular concept is sometimes synonymously used with days sales in accounts receivable, which has a similar meaning, and the day’s sales in receivables formula also immaculately resemble the accounts receivable formula. 

Now let’s examine how to calculate it using the accounts receivable days formula and understand it through examples. 

What is the Accounts Receivable Days Formula?

The next essential facet to cover is how to measure this parameter. To calculate it, one needs to multiply the number of days by the ratio of accounts receivable and credit sales, which is simplified in the following equation.  

Accounts Receivable Days = (Accounts Receivable / Credit Sales) x Days

In this formula, the prominent variables are explained below. 

• Account Receivables = This entity signifies the pending payments that the firm owes to the customers. 

• Credit Sales = It is derived by subtracting gross revenue from credits and other allowances. 

• Days = Number of days in the accounting period. 

Let us understand it with a simple example. 

Take company X, which has a total revenue or credit sale of $1 million in a year. But it has a pending account receivable of $20,000. 

So, to calculate the accounts receivable days, the steps go as follows: 

: (20,000/ 1,000,000) X 365

: 0.02 x 365

: 7.3 days

Hence, the accounts receivable days for company X will be 7.3 days. However, to analyze it at a deeper level, we need to go through the profit and loss statement and financial records of the company.

But what is the range of accounts receivable days that can be considered good for a firm?

Let’s find out. 

What Accounts Receivable Days are Considered Good?

As the accounts receivable days formula functions on several variables, defining its good range is a laborious task. So, it is inconceivable to come to a specific range of good account receivable days number. There are certain deciding factors in gauging it such as payment terms of the firm, it’s past trends in handling the business, etc, which bring its different values favorable to companies belonging to different sectors. 

For example, the firms involved in the oil and gas business will have a higher ARD, while companies providing daily goods will have a shorter ARD.

However, it is a prevailing opinion that having the ARD too close to the company’s agreement terms will portray it as having harsh payment conditions, which can be reflected in its degrading business potential. To avoid such scenarios, businesses must file confirmation statements on time to maintain compliance and credibility.

Progressing in the sequence, let’s understand its impact on different industries. 

Consequences of Accounts Receivable Days Formula

The effect of accounts receivable days is seen on working capital, aggregate cash flow, and the overall financial health of a firm. But it imparts certain precise impacts on other aspects as well. 

Impacts of Low Account Receivable Days: 

• Low ARD means the firm quickly receives the payments against its product, leading to a smooth cash flow across its business chain. 
• The company will have enough capital to maintain the demands of day-to-day operations.
• Such firms will have less chance of having any debt. 

Now let’s understand the opposite scenario. 

Impacts of High Account Receivable Days: 

• A firm with a high ARD will face delays in receiving the payments, which can bring snags in its financial discipline.
• Such a company will have fewer funds available for day-to-day transactions
• The specter of debt keeps looming on such firms. 

There is no denying the fact that significantly high accounts receivable days are always favored. To keep track of financial obligations, businesses must also stay compliant with tax requirements. If you are unsure about tax identification numbers, you can check out how to find your UTR number for better tax management. But in case of an unfavorable ARD, how to improve it?

Here is the answer.

How to Improve Accounts Receivable Days?

Although the accounts receivable days depend on diverse parameters, still there are certain plausible ways to improve them.  

Let’s go throw them one by one. 

• Creating Invoices Promptly: It is highly advisable to generate the invoices immediately once the product or service has been provided. Some firms wait till the end of the month to send them, which may pile up the transactions, further hurdling the overall payment discipline. 

• Opting for Advance Payments: Persuading and agreeing with the customer for advance payments will maintain the term obligation intact. The firm can make it more attractive by providing discounts and rebates. If concurring to such an agreement is not reached, one can try for a token amount during the contract, and the rest will be paid after delivery. 

• Diminishing Payment Deadlines: The more stretched the payment deadlines, the longer the company has to wait to receive the payments, which can be detrimental to the financial scenario of the company. So shortening the payment deadlines can bring an obligation on the buyer to fulfill it and will keep the financial obligations stable. 

Apart from the above-mentioned ways, certain other options can be opted such as:

• Contacting and communicating with the customers regularly.
• Renegotiating the payment terms of the agreements.
• Considering the financial options to ease the payments.
• Resending the invoices to the customer to remind the payment deadlines.

All these suggestions will facilitate maintaining ARD in a reasonable range. 

Conclusion

This analysis is sufficient to understand the accounts receivable days formula and to realize its importance in the overall business framework. From the above-furnished information, it can be inferred that firms need to gauge their account receivable days by considering other parameters to keep the business running without getting into the clutches of debt. 

For expert assistance, companies can opt for payroll services in the UK to streamline salary disbursements and tax compliance.