Days Receivable Formula: How Fast Are You Collecting What You're Owed?

Getting ready to apply for a commercial loan, but not sure if your financials will receive an approval from the bank? This is part of a series of posts explaining financial equations and ratios so that you feel more prepared when you talk to the bank about your loan request. Next up: Days Receivable.

What Is Days Receivable?

Days Receivable measures how long in days it takes a company to receive payment from goods or products sold. By comparing business revenues to a current Accounts Receivable balance, businesses can get a sense for how many times they receive full payments on their open invoices in an operating year. The larger the number, the longer it takes a company to collect payments on its open Accounts Receivable. Here's how you can calculate it:

Why Is It Important?

Days Receivable is important to track so you know how long it takes you to receive payment from your customers. Even though your business may have recorded the sale on your Profit & Loss statement, that doesn't mean the cash from the sale has been deposited in the bank yet. Making sales is important, but if you aren't collecting on your sales timely, you won't have cash to continue operating. Luckily, Days Receivable can be improved by simply monitoring your A/R Aging report and reaching out to customers with older invoices. A client check-in can go a long way, and sometimes offering a discount on a prompt payment can be a great incentive to get cash back in the door!

Example of the Days Receivable Formula

ABC Company has annual business revenues of $1,000,000 and an Accounts Receivable balance of $150,000. Its Days Receivable would be:

What would happen if that company could pick up the phone and shorten its Days Receivable to 50 days? By doing some reverse math, that business could inject over $13,000 of cash into its operation and maybe fund its next payroll, order more inventory, or pay down a Line of Credit balance.