Best possible DSO indicates the most ideal timeline in which you could expect to collect payments. There is a simple formula for calculating ADD, which starts with calculating your DSO and best possible days sales outstanding (BPDSO). How do you calculate average days delinquent? Average days delinquent formula The formula for calculating average days delinquent. Internal issues may include understaffing, disorderely collections processes, or ineffective communication with customers. If your DSO and ADD are high compared to what you expect or desire, it might indicate problems with your internal operations or customer base. a tightening of credit policies or a shortening of the collections cycle). If they move in different directions, however, it’s typically a reflection of another factor at play such as a recent change in your payment terms (e.g. When DSO and ADD rise or fall together, any new developments in your collections process are likely the reason for this. DSO and ADD typically trend in the same direction, indicating an overall improvement or decline in the effectiveness of collections. This could potentially hide the problem of late payments from view, which is why looking at late payments in isolation with ADD provides a helpful perspective.Ĭollections staff will usually look at ADD in combination with DSO to form insights. What's the value of measuring average days delinquent?īecause DSO looks at customers’ payment times in aggregate, if you have some customers paying you exceptionally early and some paying you exceptionally late, it’s possible for these two subsets to cancel each other out. Tips for speeding up collections and improving average days delinquent.
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How to calculate average days delinquent (with examples).The value in measuring average days delinquent.The difference between average days delinquent and days sales outstanding.Knowing your ADD can open the door for greater analysis of your collection efforts and where you have room to improve. Using average days delinquent as a key performance indicator (KPI) for AR can provide you with a strong understanding of how well your customers are complying with your desired payment terms. This metric looks at how many days late customers’ payments are, on average, at any given time. One of the key metrics your AR team will want to keep track of is average days delinquent (ADD), sometimes called delinquent days sales outstanding. A business’ ability to effectively manage their accounts receivable (AR) depends on them actively tracking a range of metrics, from AR turnover ratio to collection effectiveness index.
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