Do you need to calculate your average days in receivables? Here’s an overview of the process and how it can benefit your business!
Calculating your average day in receivables, or AR turnover rate as it’s otherwise known, is an important tool that business owners can use to gauge the effectiveness of their accounts receivable management system. By understanding this measure of liquidity, you’ll be able to spot any potential cash flow issues and ensure that bills are being paid on time.
What is Average Days in Receivables (ADR)?
Average Days in Receivables (ADR) is a measure of the liquidity of a company's accounts receivable. It tells you how quickly customers are paying their bills on average and is calculated by dividing one year’s worth of accounts receivable by the total amount of sales over that same period, then multiplying it by 365 days. By gaining an understanding of your ADR figure you can develop an effective cash flow plan to ensure your business is generating enough income to cover its expenses.
Calculating your Average Days in Receivables begins by gathering the following figures for the year: total accounts receivable, total sales, and total days. Start by adding together all of the accounts receivable for that year and divide by 365 days. Then, divide that result into the total sales from the same period. This will give you your average days in receivables figure. Using this number, you can determine how long it typically takes for customers to pay their invoices each month on average and plan accordingly to ensure that your business has enough cash on hand during any collection lulls.
How to Calculate Your Business' ADR?
Calculating your business' Average Days in Receivables is a fairly straightforward process. First, calculate your total accounts receivable. This can be done by adding up all of the amounts owed to your company by its customers. Next, divide this figure by the amount of sales over that same period and then multiply it by 365 days. The result will be your ADR figure, which should give you an indication of how quickly customers are paying their bills on average.
For a clearer picture of your average days in receivables, it’s best to track this metric over time and look for any significant changes. If you notice that ADR is increasing significantly, it can be an indication that customer payments are taking longer than normal, meaning it’s time to take a closer look at why customers are taking longer than usual. Additionally, tracking ADR over time lets you identify trends as they arise and make sure your accounts receivable isn’t increasing more than expected.
Benefits of Knowing Your Company's ADR?
Knowing Average Days in Receivables can give you a better understanding of how healthy your business is and how efficient you are at collecting payments from customers. With this knowledge, you can adjust the way that credit is given out and take steps to ensure that customers are paying their bills on time. Additionally, it can help you manage working capital more efficiently and use resources more effectively.
To determine your company's Average Days in Receivables (ADR), you must first calculate Nett Accounts Receivable (NAR) Balance. This is the total amount of money that customers owe to your business and is calculated by subtracting any discounts, credits, and write-offs from the total debtors balance. To get an accurate figure of the ADR, divide the NAR balance by the average credit sales over a period of time. This will give you an idea of how many days it takes on average for customers to pay their bills. Knowing this information and taking action to improve it can have positive long-term consequences for business success.
Use Cases of ADR Analysis.
Average Days in Receivables (ADR) analysis is a valuable tool for assessing the health of your business’ operations. ADR can be used to identify problems in the credit and collection process, uncover seasonal trends, and analyze the efficiency of customer payment cycles. Additionally, ADR can help you estimate future cash flow needs, develop an effective credit policy, and ensure that resources are being used efficiently. The calculation for ADR is fairly straightforward. To start, simply add all of the receivables for one period, then divide that total by the number of days in that period. For example, if you have $100,000 worth of receivables during a 90-day period, your average days in receivables would be 100,000/90 = 1,111.11. This result can be used to inform decisions about credit policies and cash flow management over time.
Revise Your Collection Process to Lower ADRs.
Once you've identified areas of the collection process that may be causing increased ADRs, it’s time to implement changes that will lower average days in receivables. This could include streamlining payment processes, adding automated reminders, increasing communication with customers on outstanding invoices, or even implementing a credit hold policy until accounts are paid. Additionally, you should consider offering additional financing options to customers to help them complete payments sooner.
After you’ve implemented these changes, review your accounts receivable report again to confirm that ADRs have been lowered. Monitor incoming payments closely and take appropriate action to ensure prompt payment of outstanding invoices. Keeping an accurate record of information surrounding your customer accounts such as contact details, credit policies, and terms enforced will also help make collection processes more efficient while reducing the amount of time needed to collect receivables.