Average Days Delinquent Formula & Definition

To optimize your cash flow and minimize late payments, it is vital for AR teams to make the most of the data available to them. One of the most important metrics to monitor is average days delinquent (ADD)., which is also known as delinquent days sales outstanding. Keeping track of the number lets you know how many days late customers are paying, on average, at any given time.

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

Featured Resource: The Ultimate AR Collections Benchmarks Report

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.

What is the difference between DSO and Average Days Delinquent?

On the surface, it is easy to mistake Days Sales Outstanding (DSO) and Average Days Delinquent (ADD). Both help you understand how long it takes your customers to pay. However, there is a key difference between the two. DSO measures the amount of time it takes for your customers to pay, which includes those who pay early or on time. ADD only measures those payments that come in late.

While DSO helps you understand your average customers’ payment behavior, ADD helps you understand the severity of your typical late payment.

High vs. Low Average Days Delinquent: How to interpret your ADD

Having a high Average Days Delinquent indicates that customers are taking a long time to make their payments, holding onto their money as long as possible. By contrast, a low ADD indicates that most past-due payments are not severely delinquent.

Typically speaking, ADD is measured in conjunction with DSO. If both DSO and ADD are high or low, it means that the metrics are aligned. This would indicate either an improvement or deterioration of your dunning process. However, a high DSO and low ADD, or vice versa, does not necessarily indicate effective collections, as seasonality may be at play. Other factors, such as modified credit terms, could also lead to the discrepancy.

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.

How do I improve my average days delinquent?

There are simple steps that any organization can take to improve their average days delinquent.

• Clearly communicate payment deadlines. Frequently, late payments are caused by a company’s failure to clearly state when payment is expected. The due date may not be placed in an easily visible location on the invoice or could be missing altogether. It’s also important to use common and easy-to-understand terms when outlining payment expectations. Standard examples include “Net 30” or “end-of-month.”
• Let customers know exactly what they owe. Your invoice should clearly state the total amount owed. Ideally, you should offer customers a self-service payment portal that allows them to see open invoices, credits, and payment history, as well as make payments. You can facilitate this by including a direct link to the payment portal as part of your electronic communications and invoice presentment.
• Adopt an automation solution.  Studies have shown that companies using manual AR processes take 30% longer to follow up on invoices than those using automation. AR automation software will immediately send out invoices, payment reminders, and dunning notices until payment is received, keeping the bill top of mind and ensuring fast resolution.
• Monitor customer creditworthiness. Just because a customer qualified for a certain level of credit in the past, doesn’t mean that they still qualify. Customer circumstances can change, and sometimes this can impact their credit qualifications. That means keeping a real-time view of things like payment history and monitoring customer scorecards. If certain customers show a tendency to pay late, it may be time to change their terms or discuss payment plans that help them meet their obligations.
• Let AI help with dispute resolution. Invoice disputes can also lead to delays in payment. Adopting a solution that leverages AI and machine learning to assess disputes can help with faster resolution. The software will analyze a dispute, prioritizing it based on severity, and direct it to the appropriate employee. Not only does that help get you paid faster, but helps you maintain the customer relationships you’ve cultivated.

➜ See how your ADD performs With Our AR Collections Benchmarks Report