Formula to Calculate Accounts Receivable Days

Accounts receivable days is a key financial metric that measures how quickly a company collects payments from its customers. This guide explains the formula, how to calculate it, and what the result means for your business.

What is Accounts Receivable Days?

Accounts receivable days is a financial ratio that indicates the average number of days it takes for a company to collect payment from its customers after a sale has been made. It's calculated by dividing the average accounts receivable by the net credit sales, then multiplying by the number of days in the period.

This metric helps businesses assess their cash flow efficiency and credit policies. A lower accounts receivable days ratio indicates better cash flow management, while a higher ratio may suggest customers are taking longer to pay or the company is offering more credit terms.

Formula

Accounts Receivable Days = (Average Accounts Receivable / Net Credit Sales) × Number of Days in Period

Where:

Average Accounts Receivable is the average balance of accounts receivable during the period.
Net Credit Sales is the total sales made on credit during the period.
Number of Days in Period is typically 365 for annual calculations or 30 for monthly.

How to Use the Formula

Calculate your average accounts receivable for the period by adding the beginning and ending balances and dividing by 2.
Determine your net credit sales by subtracting cash sales from total sales.
Choose the appropriate number of days in your period (365 for annual, 30 for monthly).
Plug these values into the formula to calculate accounts receivable days.

For monthly calculations, using 30 days is standard. For annual calculations, 365 days is typically used.

Example Calculation

Let's say you have the following data for a quarter:

Beginning accounts receivable: $50,000
Ending accounts receivable: $70,000
Total sales: $500,000
Cash sales: $100,000
Number of days in quarter: 90

Step 1: Calculate average accounts receivable

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

Step 2: Calculate net credit sales

500,000 - 100,000 = $400,000

Step 3: Apply the formula

(60,000 / 400,000) × 90 = 13.5 days

Your accounts receivable days is 13.5 days.

Interpreting the Result

The accounts receivable days ratio helps you understand how efficiently your company is collecting payments from customers. Here's what different results mean:

Days	Interpretation
Less than 30 days	Excellent cash flow management. Customers are paying quickly, which is good for liquidity.
30-60 days	Moderate cash flow. You're collecting payments within a reasonable timeframe.
60-90 days	Somewhat slow collection. You may need to improve credit policies or follow up on overdue accounts.
More than 90 days	Poor cash flow. You're offering too much credit or customers are taking too long to pay.

Comparing your accounts receivable days ratio to industry benchmarks can provide additional context. For example, in retail, 30 days is generally considered good, while in manufacturing, 60 days might be more typical.

FAQ

What is a good accounts receivable days ratio?

A good ratio varies by industry. Generally, less than 30 days is excellent, 30-60 days is moderate, and more than 90 days indicates potential issues with collection.

How does accounts receivable days affect cash flow?

A lower ratio means you're collecting payments faster, which improves cash flow. A higher ratio means payments take longer to come in, which can strain cash reserves.

Can accounts receivable days be negative?

No, accounts receivable days cannot be negative. The calculation is designed to measure time, so negative results don't make sense in this context.

How often should I calculate accounts receivable days?

It's typically calculated monthly or quarterly to track trends and make adjustments to your credit policies as needed.

What factors can affect accounts receivable days?

Factors include your credit terms, customer payment habits, industry norms, and economic conditions. Offering longer credit terms will generally increase your ratio.