What Is Average Days Delinquent?
Average days delinquent (ADD) is the average day’s invoices are past due, the amount of time between invoice due date and the date it is paid. This is a snapshot in time that will help your company evaluate, along with other calculations, the overall performance of your collections department and your ability to convert AR to cash.
Calculating ADD is a multi-step process that begins with knowing your Days Sales Outstanding (DSO).
First, calculate your average DSO:
DSO = (Average AR / Billed Revenue) x Days
Next, determine your Best Possible DSO
Best Possible DSO = (Current AR / Billed Revenue) x Days
Use these formulas to get to your ADD
ADD = Days Sales Outstanding – Best Possible Days Sales Outstanding
When we use simple data, it looks like this:
Total accounts receivables: $25,000
Current accounts receivables: $6,000
Credit sales made in a 30 day period: $15,000
DSO = ($25,000/$15,000) x 30
50 DSO
Best DSO = ($6,000/$15,000) x 30
12 Best DSO
ADD = 50 - 12
38 ADD
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Why ADD matters
When evaluated with other key metrics, ADD can help you assess the health of your collections process. Typically, ADD is evaluated in relation to DSO, to see if collections and cash flow are trending in the right direction. These two metrics typically trend in the same direction, letting you know if your collections efforts are improving or becoming less effective. Occasionally, businesses find the numbers moving in different directions, which suggests that rather than seeing an improvement in collections efficiency, some other change has occurred like changing credit terms or a shortened AR cycle.
This metric can be applied across a customer base as well as to individual customer accounts to track the health of the account.
Challenges
As a standalone metric, ADD doesn’t necessarily tell you a lot about your business. First, it’s a snapshot in time, so you want to capture the data over time and follow the direction it’s trending. Second, ADD can be impacted by factors such as a sudden spike in sales or a paid dispute. While this influx of business, especially if it’s a promotion running where payment is upfront, or a large outstanding dispute is finally paid, can create the illusion that ADD has improved, in fact, it hasn’t shifted at all.
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