Sageworks, a financial information company, recently conducted a financial statement analysis and found that of the many industries in which business operate, there are ten that typically have a harder time with rapid accounts receivable collection than others. Read below to learn which industries have historically high accounts receivable days and what exactly that means for businesses operating within them.
“Accounts receivable days is the number of days that a customer invoice is outstanding before it is collected. The point of the measurement is to determine the effectiveness of a company’s credit and collection efforts in allowing credit to reputable customers, as well as its ability to collect cash from them.” (Definition from accountingtools.com)
The following ten industries struggle more than most to get paid on time:
- Management of companies and enterprises: Accounts receivable days= 125.1
- Oil and gas extraction: Accounts receivable days= 110.9
- Technical and trade schools: Accounts receivable days= 109.3
- Automotive equipment rental and leasing: Accounts receivable days= 104.4
- Outpatient care centers: Accounts receivable days= 99.0
- Support activities for mining: Accounts receivable days= 90.8
- Architectural, engineering, and related services: Accounts receivable days= 74.4
- Scientific research and development services Accounts receivable days= 70. 8
- Foundation, structure, and building exterior contractors: Accounts receivable days= 67.5
- Other heavy and civil engineering construction: Accounts receivable days= 66.5
What does this mean for those businesses operating in those industries?
Seeing such high numbers like those above can be quite shocking, but they are not necessarily the end of the world for businesses in those industries. Of course, every company wants to reduce accounts receivable days as much as possible, but there are other factors at play here such as business models and industry averages.
For example, it could be pretty normal for accounts receivable days to reach 70 days in the construction industry. So if you’re right around that number, you’re in pretty good shape. If you’re much higher, then that could be a sign that you have a real invoice collection and cash flow problem.
Here are a few best practices for companies to follow, regardless of your industry, to gauge the health of their own accounts receivable collection performance.
Know your metrics. The first step in evaluating your company’s AR performance is knowing where you stand. The formula for accounts receivable days is (Accounts Receivable / Revenue) x Number of Days In Year. There are many other accounts receivable metrics to measure and track, so never let this be the only indication of the health of your invoice collection process.
Compare your metrics. Once you know your accounts receivable days, it is essential to compare it to your peers and industry averages. If you’re right in line with your peers or lower, that’s good news. If you’re higher, then you know there is some work to be done to reduce your accounts receivable days.
Learn more: Business Credit Management and Your Industry
Make a plan. Once you understand where you stand in comparison to your peers, it may be time to start making adjustments to your invoice collection strategy to reduce accounts receivable days. You’d be surprised at how just a few simple changes can make a big impact. For example:
- Finding ways to get your invoices to customers faster, such as electronic invoicing instead of snail mail.
- Calling customers after invoice delivery to ensure they did receive it and if there are any problems that might delay payment.
- Sending monthly statements or emails to remind customers of upcoming invoice due dates.
- Using a business credit application template before extending credit to any customer