Getting paid late can slow down your business. When customers take too long to settle invoices, cash gets stuck. According to a Quickbooks survey, over 70% of SMBs have been negatively impacted by extended payment terms or late payments in the last year. This can make it harder to pay vendors, cover daily costs, or plan for growth. If this happens often, it can lead to bigger financial problems.
The days in receivables ratio helps track how long, on average, it takes to collect payments. A high number means customers are paying late. A low number means you’re collecting faster. But how do you know if your ratio is too high? And what can you do to lower it?
In this guide, you’ll learn the exact formula to calculate your ratio, how to compare your number to industry standards, and the best ways to speed up collections and improve cash flow.
What Is the Days in Receivables Ratio?
The days in receivables ratio tells you how long it takes to collect payments after making a sale. It shows whether customers are paying on time or if money is getting stuck in unpaid invoices. A lower number means cash comes in quickly. A higher number means customers take longer to pay, which can slow down your business.
Example: Let’s say a business sells office furniture. It lets customers buy on credit and gives them 30 days to pay. However, most of them take 50 days instead. Thus, their days in receivables ratio is 50 days, not 30.
This can cause problems. You might struggle to pay vendors, restock products, or cover rent. If the number keeps growing, your business could run short on cash.
Now, let’s say your customers pay in 25 days instead. That means money comes in faster, making it easier to pay expenses and plan.
Tracking this ratio helps businesses manage cash flow, adjust credit terms, and improve collections. In the next section, we’ll go over the formula so you can calculate it for your business.
How to Calculate the Days in Receivables Ratio?
The days in receivables ratio shows how long it takes, on average, to collect payments after a sale. It helps businesses determine whether customers are paying on time or whether cash is getting stuck in unpaid invoices.
Here’s the formula:
Days in Receivables Ratio = (Accounts Receivable ÷ Total Credit Sales) × Number of Days
Breaking Down the Formula
- Accounts Receivable – The total amount customers owe for unpaid invoices.
- Total Credit Sales – The total sales made on credit, not including cash payments.
- Number of Days – The period for the calculation (usually 365 days for a full year, 90 days for a quarter, or 30 days for a month).
Step-by-Step Calculation
Let’s apply the formula by following some simple steps to calculate the days in receivables ratio.
Step 1: Choose the Time Frame
Decide if you are calculating for a year (365 days), a quarter (90 days), or a month (30 days).
Step 2: Find the Average Accounts Receivable
If your accounts receivable balance changes over time, use the average:
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) ÷ 2
Step 3: Apply the Formula
Now, use the average accounts receivable in the formula:
Days in Receivables Ratio = (Average Accounts Receivable ÷ Total Credit Sales) × Number of Days
Example Calculation
A company sells office furniture to businesses on credit. At the end of the year, their financial records show:
- Beginning Accounts Receivable = $40,000
- Ending Accounts Receivable = $60,000
- Total Credit Sales = $500,000
Step 1: Find the Average Accounts Receivable
(40,000 + 60,000) ÷ 2 = 50,000
Step 2: Apply the Formula
(50,000 ÷ 500,000) × 365 = 36.5 days
This means, on average, the company takes 36.5 days to collect payments after a sale.
Industry Variations
Different industries have different payment cycles, which impact their days in receivables ratio. Understanding these variations can help businesses set realistic benchmarks.
- Retail businesses usually collect payments faster since most customers pay at the time of purchase.
- B2B companies often have longer payment cycles, sometimes 30 to 60 days, since they allow businesses to pay later.
- Subscription businesses typically have a low ratio since payments are collected automatically.
Tracking this ratio helps businesses see how fast they collect payments compared to industry standards. In the next section, we’ll explain what your number means and how to improve it.
How to Interpret the Days in Receivables Ratio?
The days in receivables ratio helps businesses assess their credit and collections efficiency. A lower ratio suggests that the company collects payments quickly, improving cash flow and reducing the risk of bad debts.
On the other hand, a higher ratio indicates delayed collections, which could tell that there are inefficiencies in credit policies or financial strain due to slow cash inflows.
- A lower ratio (e.g., 20 days) means customers pay on time. This keeps cash flowing, helps cover expenses, and reduces the risk of unpaid invoices.
- A higher ratio (e.g., 60 days) means payments are delayed. This can slow down business, make it harder to pay vendors, and create financial stress.
Example: A company sells building materials to contractors on credit. After calculating its days in receivables ratio, it found that it is 55 days.
- If most companies in their industry collect payments in 45 days, their ratio is too high. This suggests they may need to follow up on invoices faster or adjust credit terms.
- If the industry average is 60 days, their ratio is better than the average. This means they are collecting payments faster than competitors.
Businesses compare their ratios to industry benchmarks to determine whether they need to improve. A high ratio is not always a bad sign, but it should be monitored to avoid cash flow problems.
Next, we’ll look at the key factors that affect this ratio and how businesses can improve it.
Factors That Affect the Days in Receivables Ratio
Several factors influence how long it takes a business to collect payments. Industries like Construction, Manufacturing, Wholesale, and Distribution have longer payment cycles, while others get paid immediately. A business that sets clear payment terms and follows up on invoices will usually collect payments faster.
1. Credit Terms and Payment Policies
The time a business gives customers to pay affects how quickly they pay. If a company allows 60 days, it will wait longer than one that requires payment in 30 days.
Example: A business offers 45-day payment terms, but many customers take longer to pay. To speed up collections, they switch to 30 days and offer a small discount for early payments. This helps them get paid faster and improves cash flow.
2. Invoice Follow-Ups and Collections
Sending invoices is not enough. A business needs to remind customers when payments are due. Without follow-ups, customers may delay payments, increasing the receivables ratio.
Example: A company notices that many invoices go unpaid past the due date. It may start sending reminders and charging late fees. With this, more customers can start paying on time and can improve their receivables ratio.
3. Industry Norms and Payment Behavior
Businesses like Retail and e-commerce get paid quickly, while others wait longer because of how their industry works.
Example: A retail store gets paid immediately at checkout. A business that sells office supplies to large companies waits longer because these businesses process payments at scheduled times.
4. Economic Conditions
During financial downturns, businesses and individuals may delay payments to manage their expenses. Even customers who usually pay on time might take longer, increasing the receivables ratio.
Example: A business that normally gets paid in 30 days may start seeing payments take 50 days. After checking with customers, they may learn many are facing cash flow issues. To keep money coming in, they offer installment plans.
Understanding these factors can help businesses make better decisions to improve cash flow. Next, we’ll examine ways to speed up collections and lower the receivables ratio.
How to Reduce the Days in Receivables Ratio?
A high days in receivables ratio means a business waits too long to get paid. This can slow down cash flow and make it harder to cover costs. Lowering this ratio helps businesses collect payments faster and keep operations running smoothly.
1. Set Clear Payment Terms
The longer customers have to pay, the longer a business waits for cash. Shorter payment terms help collect money faster. For example, if customers have 60 days to pay, switching to 30 days can speed things up. Payment terms should always be written on contracts and invoices.
Example: A business allows 45 days for payments but struggles with late invoices. It updated its policy to 30 days and offered a small discount for payments made within 10 days. More customers paid early, and the receivables ratio improved.
2. Send Invoices Right Away
If invoices are not sent on time, payments will not arrive. Businesses that wait until the end of the month to send invoices often face delays. Using an automated system helps ensure invoices are sent immediately.
Example: A company sends invoices only once a month, delaying payments. It then switches to sending invoices immediately after each sale. Customers start paying sooner, and cash flow improves.
3. Follow Up on Late Payments
Some customers forget about invoices if they don’t receive reminders. Businesses that check-in before the due date and follow up on late payments often collect money faster.
Example: A company may notice that many invoices are paid late. It starts sending reminders one week before the due date and follows up two days after if payment hasn’t arrived. More customers can start paying on time, which can decrease the receivables ratio.
4. Make Payments Easier
Some customers delay payments because the process is inconvenient. Businesses that offer multiple payment options—like credit cards, online transfers, and automatic payments—make it easier for customers to pay on time.
Example: A business only accepts checks, and customers take weeks to mail them. They add credit card and online payment options. More customers pay right away, reducing the receivables ratio.
5. Charge Late Fees for Overdue Payments
Customers are more likely to pay on time when there are penalties for late payments. A small fee or interest charge on overdue invoices can encourage faster payments.
Example: A company introduces a 2% late fee for payments more than 10 days overdue. Customers start paying sooner to avoid extra charges, helping the business collect money faster.
These steps help businesses get paid on time and improve cash flow. Next, we’ll go over why tracking the days in the receivables ratio matters.
Why Tracking the Days in Receivables Ratio Matters?
Tracking the days in receivables ratio helps businesses keep cash flow steady, improve collections, and avoid unpaid invoices.
1. Helps Maintain Cash Flow
Businesses need cash to cover expenses like payroll, rent, and vendor payments. If customers take too long to pay, it can create financial stress. Watching the receivables ratio helps businesses spot cash flow problems before they get worse.
Example: A company notices its receivables ratio is increasing. Customers are paying later, making it harder to manage expenses. They start sending invoices immediately after a sale and follow up before due dates. Payments arrive sooner, improving cash flow.
2. Highlights Collection Issues
A high ratio can indicate that customers are slow to pay or that the business is not following up enough. Tracking the ratio helps businesses identify collection issues early and make changes.
Example: A business realizes its ratio is much higher than competitors. After checking its records, it sees many unpaid invoices. It starts sending reminders before due dates and charging late fees. As more customers start paying on time, the ratio improves.
3. Compares Performance to Industry Standards
Different industries have different payment cycles. Comparing the receivables ratio to industry averages helps businesses see if their collections are on track. If the ratio is higher than others in the same industry, it may be time to change payment terms.
Example: A wholesale business checks its ratio against competitors. Most companies in the industry collect payments in 30 days, but their ratio is 50 days. They adjust their credit terms and start requiring shorter payment periods.
4. Reduces the Risk of Unpaid Invoices
The longer a payment is overdue, the less likely it is to be collected. Tracking the receivables ratio helps businesses identify slow-paying customers before they become a bigger problem.
Example: A company notices that one customer is always late. To reduce the risk, it changes its policy and requires partial upfront payments on future orders. This helps it avoid long delays.
Keeping track of the days in receivables ratio helps businesses get paid faster, reduce financial risk, and keep cash flow steady. Next, we’ll learn strategies to optimize these ratios.
Strategies to Optimize Days in Accounts Receivable
Reducing the days in receivables ratio helps businesses get paid faster and keeps cash flow steady. Simple steps like improving collections, using automation, and setting clear payment terms can speed up the process and reduce the time it takes to collect payments.
1. Improve Collections with Proactive Follow-Ups
Waiting for payments to be late can cause delays. It’s better to send reminders before payments are due and follow up quickly if they are late. This helps keep the process moving and ensures customers pay on time.
Example: A business notices that many customers pay late. To fix this, it starts sending reminders one week before payments are due and following up immediately if payments are overdue. This makes customers pay faster and helps the business maintain a steady cash flow.
2. Use Automation to Speed Up Payments
Automating invoicing and payment reminders can save time and reduce mistakes. Automated systems can send invoices quickly and remind customers to pay on time, so the business doesn’t have to keep track manually.
Example: A business sends invoices manually at the end of the month, causing delays. They switch to an automated invoicing system that sends invoices immediately after each sale. The system also sends automated reminders, and payments come in on time.
3. Offer Early Payment Discounts and Set Clear Terms
Encouraging customers to pay earlier can speed up collections. Offering a small discount for early payment gives customers an incentive to do so. Setting clear terms from the start also lets customers know exactly when to pay.
Example: A business offers 45-day terms, but customers often pay late. To address this, the business shortens the terms to 30 days and offers a 2% discount for payments within 10 days. As a result, customers pay earlier, and cash flow improves.
4. Offer Flexible Payment Options
Offering different ways for customers to pay makes the process easier. Whether it’s credit cards, bank transfers, or online payment systems, giving customers multiple options can help get payments in faster.
Example: A business accepts credit card payments, bank transfers, and online payments. These options make it easier for customers to pay, which speeds up collections and keeps cash flow steady.
5. Train Your Team on Collections
Your team needs to know how to handle unpaid invoices. Training them to politely remind customers and follow up consistently will improve your collection process.
Example: A business trains staff to follow a specific payment collection process. They learn to be clear and polite when sending reminders, which leads to quicker payments and better customer relationships.
6. Keep Communication Open
Good communication with customers helps resolve issues quickly. Keeping in touch about payment deadlines or delays helps ensure payments are made on time.
Example: A business regularly checks in with customers if payments are late and asks if there are any problems. This helps build trust and encourages timely payments in the future.
By following these best practices, businesses can manage accounts receivable, reduce delays, and maintain a steady flow of cash.
How Peakflo Can Help Optimize Your Days in Accounts Receivable Ratio
If you’re looking for a way to get paid faster and keep your cash flow steady, Peakflo is the answer. It automates your invoicing, payment reminders, and tracking, making the process much smoother and quicker. Here’s how Peakflo Invoice-to Cash solution helps reduce your Days in Receivables Ratio and improve your cash flow:
1. Automate Invoicing
With Peakflo’s automated invoicing, that’s exactly what happens. No more delays in sending invoices. The faster your invoices go out, the quicker your payments come in. It’s a simple way to get paid faster and improve your cash flow.
2. Automate Payment Reminders
Chasing late payments can be frustrating, but Peakflo makes it easy with automated payment reminders. You won’t have to send reminders manually anymore—Peakflo sends them on your behalf. It’s a quick and easy way to encourage customers to pay on time.
3. Smart Task Management
Peakflo’s Collections CRM empowers teams to collaborate seamlessly, boosting productivity with automated tasks and real-time customer responses. Say goodbye to manual spreadsheets—track collections efficiently with a bird’s-eye view of receivables and KPIs. Stay on top of every follow-up with task management and team activity reports.
4. Real-Time Tracking and Reporting
Peakflo gives you the power to see exactly where your money is. With real-time tracking and AI-powered reports, you’ll always know who owes what and when. This helps you stay on top of overdue payments and make sure nothing slips through the cracks.
5. Simplify Customer Interaction with a Customer Portal
Peakflo’s customer portal lets your clients view and pay invoices whenever it’s convenient for them. This self-service tool reduces delays and makes it easier for customers to settle their bills on time. It’s a simple way to improve customer experience while getting paid faster.
6. Automated Cash Application and Reconciliation
With an AI-powered cash application solution, Peakflo matches payments to invoices automatically. No more manual work or errors. This speeds up the process and ensures everything is accurate so you can focus on growing your business instead of matching payments.
Conclusion
Managing your days in receivables ratio is key to maintaining your business’s cash flow. The quicker you can collect payments, the easier it is to cover costs and grow. Automating invoicing, reminders, and follow-ups can speed up the payment process and reduce delays.
With Peakflo, businesses can simplify the accounts receivable process. It helps you send invoices on time, track payments, and follow up with customers automatically. This way, you stay on top of overdue accounts and get paid faster.
If you’re ready to improve your receivables and boost your cash flow, Peakflo can help. Book a demo and see how Peakflo makes managing your accounts receivable simple and efficient!
