Why should you count the days until you get paid?

The term ‘Accounts Receivable’ may not be new to you, but have you heard the term ‘Accounts Receivable Days’?  This is not the number of days that you give your customers to pay, but the number of days, on average, that all of your customers are actually taking to pay you.

‘Accounts Receivable Days’ is the result of a formula calculating the average number of days it takes customers to pay from date of invoice until you receive payment.

Accounts Receivable Days = Accounts Receivable/Revenue x Time Period

e.g.     Accounts Receivable           =$150,000

            Revenue                          =$800,000

            Time Period                     =365 days

            150,000/800,000 x 365      =68.44

This example indicates that a business with Revenue of $800,000 and Accounts Receivable of $150,000 is taking, on average, 51 days to collect payment from its customers. 

The value of knowing the Accounts Receivable Days of 51, is that the business now has a simple indicator to work with and use as a starting point to measure improvement

Another benefit of knowing this number, as opposed to just looking at the dollar value of amounts owed by customers, is that it’s a relative figure.  e.g. using the above example, if the Accounts Receivables rise to $250,000 is this good or bad?  It depends on the relative Revenue figure.  Just looking at a dollar number makes it difficult to manage.  Whereas tracking the number of days is an easy indicator to manage, both for the business owner and the accountant or bookkeeper.

Importantly, if this is a growing business wanting to fund growth through external debt i.e. borrowings, any lender would look very closely at this number.  It’s a prime indicator of how well the business manages its own money, and therefore how it would manage the lender’s funds.

Many businesses grow rapidly and get very focused on Revenue growth.  This is fine, but focus also needs to be on collecting payment for sales made.  If not, cash-flow can quickly get squeezed, which can strangle any hope of continued business growth.  It becomes a vicious circle, as a lender won’t lend the necessary funds until the business demonstrates it has firm control over its cash-flow.

Managing Accounts Receivable Days

It really boils down to making sure you get paid as quickly as possible.  A retail business doesn’t have this type of problem as it gets paid immediately, however most other businesses give ‘customer credit terms’.  Following are some tactics you can use to shorten the Accounts Receivable Days:

• Invoice as quickly as possible – have a system and a person responsible for this process.
• Ensure your customers know the credit terms – if you leave them in the dark they will decide for themselves what the terms are.
• Provide professional looking invoices, with payment terms on them – it indicates you are serious about debt collection.
• Send out statements regularly –it reminds customers again that you are serious.
• Provide as many methods of payment as possible.  Credit card merchant fees may seem expensive, but they are often not as expensive as waiting 90 days for someone to write and post a cheque.
• Be prepared to chase up with phone calls and emails.
• Keep records of reasons given for non payment and politely repeat back to slow payers why they didn’t pay last time.  They soon get the message you are ‘on the ball’ and you will be first on the list for payment.
• Be prepared to sue those who refuse to pay.  This may sound like an extreme measure but unless you are really dependant upon one or a small number of customers you may be better off without slow payers.  They may be costing you valuable resources you could be using to service better payers.
• Remember the longer you leave a debt outstanding the harder it is to collect, so anything you can do to speed up the process increases your chance of getting paid.