How to Calculate Accounts Receivable Days

Does this sound familiar? You’ve delivered your product/service, and sent the invoice, and now you’re just waiting. Weeks go by, yet you haven’t received your payment. Many businesses in the UK suffer from this issue as it slows down cash flow. It disrupts your business operations.

This is why you need to know how to calculate your account receivable (AR) days. This metric tells you, on average, how long it takes for your customers to make payments. It lets you understand your business finances and identify cash flow issues early.

In this article, we explain what AR days are, how they work, and how to calculate them. You will also learn how to reduce your AR days to speed up payment collection. And we’ll also touch on Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What are accounts receivable days, and how does it work?

AR days is a metric that tells you how long your business takes to collect cash from customers after a credit sale. In other words, it’s the average number of days between issuing an invoice and getting paid. Think of it as a speedometer, which indicates that the fewer the days, the faster you get paid.

When you sell goods or deliver services on credit, you record that amount as accounts receivable. AR days indicate the speed at which you convert outstanding debts into cash. Small-to-medium businesses throughout the UK use this metric to manage cash flow. Your business's cash flow will suffer if it takes too long to collect your AR. This is because you need a smooth cash flow to cover expenses and keep your operations running smoothly.

Follow this example to understand how it works. A marketing agency sets its payment terms to 30 days. However, when they check their financial records, they find that their AR days reach 50. The additional 20-day delay creates cash flow gaps that prevent the company from settling expenses on time.

The agency then takes corrective actions by sending payment reminders and offering discounts to customers who pay early. They reduced their AR days to 32, improving their cash flow.

You can detect early cash flow problems by tracking their AR days. This in turn will make you take action before it becomes worse. A low AR number indicates efficient cash flow management, which helps companies prevent financial bottlenecks.

Why are accounts receivable days calculation important?

Calculating AR days is important for your business. It impacts financial stability, daily operations, and your ability to plan for the future. Without it, you might not see cash flow issues coming until they’re a problem.

For instance, late payments hurt UK businesses, with 26% struggling to reinvest, 20% missing targets, and 25% unable to pay suppliers. Calculating AR days will help you identify these delays early and keep cash flowing.

It also shows if there’s credit risk. You can use your AR days calculation to design better credit terms that provide flexible payment options to trustworthy customers. You can also use it to tighten policies for customers with higher payment risks. This reduces the probability of missing payments and bad debts.

Furthermore, calculating your AR days helps financial forecasting. If you know when to expect cash, you can budget and plan your finances better. It will help maintain trust with suppliers, avoid penalties, and ensure that your operations run without financial challenges. In the next section, we will explain how to calculate your AR days.

How do you calculate accounts receivable days?

Calculating AR days is straightforward. It’s a practical step to keep your cash flow on track. You only need a few financial figures from your records to proceed. Let’s use an example to make it easier to understand.

Assume you’re a retailer who wants to calculate your AR days in the previous year. Your total net credit sales were £500,000, and the money customers owed you was £68,493 in that accounting period.

The first step is to establish your average daily sales. Start by dividing total net credit sales by the number of days in the accounting period, which is 365 days.

£500,000 divided by 365 days is £1,369.86.

So, your average daily sales figure is £1,369.86.

Next, divide the average AR balance by the average daily sales.

So, £68,493 divided by £1,369.86 results in approximately 50 days.

This means, on average, it takes you 50 days to collect payments from your customers.

In a case like this, you would have to investigate your credit terms and collection process because your average AR days are high. Collecting your AR in 50 days would negatively affect your cash flow and business operations.

Accounts receivable days outstanding formula

We previously shared how to calculate your AR days using an example. However, the formula for calculating it is below.

AR days outstanding = (Average AR ÷ Net credit sales) x Number of days in the accounting period

Where:

Average AR = (Beginning AR + Ending AR) ÷ 2

Net credit sales = Total sales made on credit, excluding cash sales.

Note that the number of days in your accounting period is not always the same. It depends on your accounting period. For instance, your accounting period could be monthly, quarterly, or annually. Therefore, the number of days in your accounting period could be 30 or 31, 90 or 365, respectively.

How to analyse accounts receivable days?

After calculating your AR days, you need to interpret its meaning. Analysing your AR days would help you make better decisions for your cash flow management. To do this successfully, you need to identify patterns that guide future business operations.

Start by examining your AR ageing reports, where overdue invoices receive classification based on how long they have been unpaid. For example, you could categorise them as 0–30 days, 31–60 days, 61–90 days and beyond 90 days. If there are a lot of overdue invoices in longer ageing periods (e.g., invoices overdue by more than 90 days)., it suggests problems with your AR collection method or payment difficulties among customers.

Another important report to look at is your AR turnover ratio. It lets you know how frequently you collect receivables during a specific period. A low turnover ratio indicates slower collections, which affects how much working capital is available. You should also analyse your AR days in different account periods to help you measure operational efficiency.

It doesn’t end there; you need to look at the bigger picture for better understanding. Compare your AR days with your standards. For instance, if your competitors collect payments within 30 days but your AR days average 50, it may be time to review your invoicing process or tighten credit terms.

How to reduce accounts receivable days outstanding?

If your AR days outstanding are higher than you would like, we will discuss some corrective measures. There are steps to take to bring the number down without making it harder for your customers to pay. Below are ways to reduce your outstanding AR days.

• Set stricter approval criteria for customers before offering credit. You can also shorten payment terms by reducing the number of days you expect payment.
• Automated systems are used to send invoices immediately and schedule follow-up reminders to prevent late payments.
• Encourage faster payments by offering small discounts to customers who pay early.
• Charge a little interest on overdue invoices to discourage payment delays.
• Regularly review AR ageing reports to identify slow-paying customers and encourage them to pay on time.
• Communicate your payment terms and quickly resolve disputes to ensure smooth transactions.

FAQs: accounts receivable days

Here are some of the common questions:

What’s the difference between accounts receivable days and accounts payable days?

AR days measure how long it takes to collect payments from customers, while accounts payable days track how long it takes for you to pay suppliers. Both metrics impact your cash flow and business operations.

How often should I calculate accounts receivable days?

Ideally, you should calculate your AR days at least monthly. You can keep a close eye on your cash flow and identify issues early enough when you calculate monthly instead of waiting for a year.

Does accounts receivable days affect my credit rating?

Yes, it does. High AR days can slow your cash flow, making you delay supplier payments. This would make lenders and suppliers hesitant to extend loans. On the other hand, if you have low AR days and a steady cash flow, it would improve your creditworthiness.

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Sources used:

Sources last checked on date: 28-Jun-2025