A/R Days Calculator

What is A/R days?

Accounts Receivable Days (A/R Days), also known as Days Sales Outstanding (DSO), is a financial metric that measures the average number of days it takes for a company to collect payments from its customers for goods or services provided on credit. It is a key indicator of a company’s efficiency in managing its accounts receivable and converting credit sales into cash. A lower A/R Days value indicates that a company is collecting payments more quickly, while a higher value suggests delayed collections.

A/R Days Calculator is expected to reduce these manual workload and improve the efficiency.

Example 1:

Company XYZ sells its products to various customers on credit. At the end of the year, the company evaluates its accounts receivable and credit sales to calculate A/R Days.

Total Accounts Receivable (end of the year): $50,000
Total Credit Sales (during the year): $500,000
Number of Days (considered for the calculation): 365 days

Now, let’s calculate the A/R Days:

AR Days = (Accounts Receivable / Total Credit Sales) x Number of Days

AR Days = ($50,000 / $500,000) x 365 days A/R Days = 36.5 days

In this example, Company XYZ has an average collection period of 36.5 days. It takes approximately 36.5 days for the company to collect payments from its customers on average.

Example 2:

Company ABC operates in a different industry and has the following financial data:

Total Accounts Receivable (end of the year): $100,000
Total Credit Sales (during the year): $1,000,000
Number of Days (considered for the calculation): 365 days

Let’s calculate the AR Days for Company ABC:

AR Days = (Accounts Receivable / Total Credit Sales) x Number of Days

AR Days = ($100,000 / $1,000,000) x 365 days AR Days = 36.5 days

In this example as well, Company ABC has an average collection period of 36.5 days.

Interpretation:

In both examples, the companies have the same A/R Days value, which indicates that, on average, it takes 36.5 days for them to collect payments from customers for credit sales.

A lower A/R Days value is generally considered more favorable as it implies quicker cash flow and better credit management. It allows the company to reinvest the collected funds, cover operational expenses, and take advantage of growth opportunities more promptly.

Conversely, a higher A/R Days value may suggest that the company faces challenges in collecting payments timely, which can impact its cash flow, liquidity, and ability to invest in business growth.

Companies use A/R Days as a benchmark to monitor their collections process, identify areas for improvement, and assess the effectiveness of their credit policies. Efficient A/R Days management is essential for maintaining financial health, managing working capital, and strengthening customer relationships with good credit privileges and credit policy.

ERP Software or Accounting software with a good financial management features can help business owner to check his balance sheet, Cash flows reports etc.

A decent receivable management practices with Accounts receivable balance and accounts payable for Suppliers can increase the financial ratios for business. To handle these its a good practice to have a good payment terms rules and credit terms / credit periods with an option to charge late payments fees on sales on credit basis. A strong accounts receivable practices could reduce your cycle time.

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Steps to calculate AR Days

Calculating Accounts Receivable Days (AR Days) is a relatively simple process that involves using the AR Days formula. The formula is designed to determine the average number of days it takes for a company to collect payments from its customers for goods or services provided on credit. Follow these steps to calculate A/R Days:

Step 1: Gather the Required Data

To calculate A/R Days, you will need the following information:

Accounts Receivable (AR) Amount: This is the total amount of outstanding invoices that are yet to be collected from customers. It represents the total credit sales that are awaiting payment.
Total Credit Sales: This refers to the total sales made on credit during a specific period, usually a year.
Number of Days: You need to specify the time period for which you want to calculate A/R Days. It could be a year, a quarter, or any other defined period.

Step 2: Apply the A/R Days Formula

The formula to calculate AR Days is as follows:

A/R Days = (Accounts Receivable / Total Credit Sales) x Number of Days

Step 3: Perform the Calculation

Plug in the values you gathered in Step 1 into the AR Days formula and perform the calculation.

Step 4: Interpret the Result

After calculating AR Days, you will obtain a numerical value. This value represents the average number of days it takes for the company to collect payments from customers, on credit, during the specified period.

A lower AR Days value indicates that the company is collecting payments more quickly, which is generally considered favourable as it improves cash flow and working capital management. Conversely, a higher A/R Days value suggests delayed collections and may signal potential issues with the company’s credit management process.