Understanding Accounts Receivable Days: How To Calculate It?

In the ever-evolving business landscape, cash flow is paramount. Accounts Receivable Days (AR Days), a metric that measures how long it takes for a business to collect payment from its customers, is an essential KPI for evaluating financial health and operational efficiency. The lower the AR Days, the faster your company is converting sales into cash, which can significantly impact its ability to scale.

Did you know? According to a 2024 FathomHQ survey, businesses with an AR Days above 60 are twice as likely to face cash flow issues than those with AR Days below 40. By using FinanceOps.ai, businesses can automate collections, predict payment behaviors, and reduce AR Days significantly.

Table of Contents:

1. What Are Accounts Receivable Days?

2. Why AR Days Matter for Your Business

3. How to Calculate Accounts Receivable Days

4. The Formula for AR Days

5. FinanceOps AI: Automating Collections to Improve AR Days

6. Key Takeaway

7. Conclusion

8. FAQs

What Are Accounts Receivable Days?

Accounts Receivable Days (AR Days) measures the average time it takes for a company to collect payments from its customers after making a credit sale. This metric is a direct reflection of your credit policies, collection strategies, and customer engagement practices.

A low AR Days means your company is efficiently collecting payments, improving cash flow, and reducing the risk of overdue accounts. A high AR Days indicates that the company may face challenges in collecting payments, potentially leading to liquidity issues or inefficient collections processes.

Why AR Days Matter for Your Business

Here’s why AR Days should be a key focus for finance leaders:

• Cash Flow: AR Days directly impact your working capital. The higher the AR Days, the more your business is at risk of cash flow disruption.
  
  

• Customer Payment Behavior: A high AR Days might indicate that customers are struggling to pay on time or that your invoicing process needs attention.
  
  

• Operational Efficiency: The longer you wait for payments, the more resources you must allocate to collections, which lowers overall efficiency.

FinanceOps.ai’s AI-powered automation helps businesses reduce AR Days by ensuring proactive engagement, personalized communication, and smarter resource allocation, all while maintaining compliance.

How to Calculate Accounts Receivable Days

The formula for calculating Accounts Receivable Days is fairly straightforward, and there are two primary methods to use:

Basic Formula:

Average Accounts Receivable Formula:

In these formulas:

• Accounts Receivable refers to the amount owed by customers.

• Total Credit Sales includes the total sales made on credit during the period.

• Net Revenue is the total revenue minus any allowances or returns.

The Formula for AR Days

The following is an example to understand the AR Days calculation more effectively:

Example:

Let’s assume:

• Beginning Accounts Receivable: $10,000
  
  

• Ending Accounts Receivable: $20,000
  
  

• Net Revenue: $100,000 (annual)
  
  
  

First, calculate the Average AR:

Average AR=10,000+20,0002=15,000\text{Average AR} = \frac{10,000 + 20,000}{2} = 15,000 Average AR=210,000+20,000​=15,000

Then, calculate AR Days using the formula:

This means it takes about 55 days on average to collect payment from your customers.

FinanceOps AI: Automating Collections to Improve AR Days

FinanceOps.ai’s AI-powered solutions can significantly improve your AR Days by automating key collection tasks. Here’s how it helps:

1. Smarter Segmentation: AI helps businesses segment their accounts by risk and payment likelihood, focusing efforts on the high-risk customers and reducing manual effort on low-priority accounts.
   
   

2. Predictive Analytics: FinanceOps uses predictive recovery insights to forecast which customers are most likely to pay, enabling proactive engagement and reducing overdue payments.
   
   

3. Automated Workflows: Automate follow-ups, reminders, and escalation processes with FinanceOps.ai’s drag-and-drop workflow builder, reducing delays and ensuring timely collections.

With FinanceOps.ai, businesses can reduce AR Days by identifying high-priority accounts and implementing personalized outreach strategies in real time.

Key Takeaway: Accounts Receivable Days is a crucial metric for assessing the health of your collections process. By reducing AR Days, you not only improve cash flow but also reduce the time and resources spent on collections.

Conclusion 

Managing AR Days is vital to improving your company’s financial health and operational efficiency. With FinanceOps.ai, businesses can leverage AI-powered solutions to automate collections, predict customer behaviors, and reduce AR Days faster than ever before.

Ready to optimize your collections process?

Book a demo today and discover how FinanceOps can help reduce your AR Days, enhance customer engagement, and streamline debt recovery.

FAQs

1. How can FinanceOps help reduce AR Days?

FinanceOps uses AI to automate collections, prioritize high-risk accounts, and personalize communication, helping to reduce AR Days.

2. What is considered a good AR Days number?

A lower AR Days number, ideally under 30 days, indicates a well-managed collections process. A higher number could signal potential collection issues.

3. How does FinanceOps’ AI-powered automation improve cash flow?

By automating follow-ups, improving customer engagement, and focusing on high-risk accounts, FinanceOps helps to reduce delays, improving overall cash flow.

4. Can FinanceOps ensure compliance in collections?

Yes, FinanceOps ensures that all communication and collection processes adhere to regulatory guidelines, minimizing compliance risks.