What is my average receivables days? Efficiency ratios are a great way of analysing the underlying operational efficiency of a business. Jazoodle assesses the efficiency of a company in a number of ways. Areas such as client revenue collection, or how effective its employees are in generating revenues and keeping costs at reasonable levels.
Average Receivables Days (ARD)
How do you measure the efficiency of people and processes within your organisation? The average receivables days metric is a great way of doing this, and an indicator of company efficiency. Assess this over time and compare periods. In Jazoodle, we assess and compare ITT across financial years as well as on an individual monthly basis.
What does it mean?
The average number of days it takes to collect your client invoices / debt. Note, for monthly calculations, we use the change in accounts receivables as the base number. The higher the figure, the less efficient the business is in collecting its client debts. Watch for this over time and look for any deterioration. An overhaul of accounts receivables processes or client communications may be needed. Alternatively, it could reflect the winning of a large account, with a client who perhaps takes longer than average to pay, but who may always do so. If this is the case, assess in conjunction with other measures, such as profitability measures or liquidity measures.
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How do we derive your ARD?
Your ARD is derived by:
Annual: 365 divided by (Total Income divided by Total Accounts Receivables)
Monthly: (365/12)/(Total Accounts Receivable – Accounts Receivable in month)
How Can I Improve my ARD?
Your ARD can be improved in a number of ways, including:
- Communicate clear client account terms
- Implement a clear account reminder and collections policy
- Devise payment on order terms
- Establish clear escalation and collection methods
- Implement staff training to ensure policy adherence