When it comes to effectively managing your accounts receivable (A/R) for credit-based sales, there are several metrics that you’d be wise to monitor to ensure that your processes — and revenue streams — are running smoothly. For benchmarking and managing the performance of your collections efforts, in particular, you’ll want to routinely report on and evaluate your average days delinquent (ADD).
This article will provide a closer look at this CFO metric, focusing on why it’s important for decision-makers, how to determine it, and how to improve it for the benefit of your business and finances.
What is average days delinquent?
Occasionally referred to as delinquent days sales outstanding, your ADD precisely measures the average delay tied to the late payments made by your customers. As such, a higher score indicates that your customers are derelict in closing out their invoices for longer. A score of 0 would mean that all of your customers finalize their payments before their scheduled due dates.
What’s the difference between average days delinquent and days sales outstanding?
At first glance, there isn’t much difference between your ADD and your days sales outstanding (DSO), which makes sense since both track the timeframe your customers require to pay. However, while your DSO considers the average days to pay taken by all customers for all sales — tracking from the receipt of an invoice to its closing — your ADD exclusively focuses on invoices and payments within the delinquent period after the initial payment is due.
While we’re taking a moment to avoid confusion, we’ll also briefly define your days payable outstanding (DPO) — another metric commonly mixed up with DSO and ADD. Put simply, your DPO tracks the amount of time your business takes on average to pay out an invoice once you’ve received it. In many ways, your DPO operates as the inverse of your DSO.
Why it’s important to measure average days delinquent
You need money to run your business, and monitoring your ADD helps ensure that the potential revenue of your A/R is converted into actual cash. After all, it doesn’t matter — at least to your bottom line — how much work you do or how many bills you send out if all of your revenue is tied up in delinquent invoices.
However, by proactively tracking this KPI in a historical context, you can:
- Identify problem customers and better avoid accruing bad debt
- Project future cash flows more accurately
- Isolate and flag issues related to your dunning processes
At the same time, you’ll also find it highly useful to contrast your ADD performance against your DSO trends. Commonly, these two figures will follow the same trends, allowing you to evaluate how various internal actions and outside events are hampering or improving your collections efficiency. And when the values diverge, you’ll know to look at other factors, such as an increase in disputes or the success (or failure) of an early payment discount.
How to calculate average days delinquent
Before accurately calculating the average days to pay for your delinquent customers, you’ll first need to identify your DSO. Fortunately, if you already know your average A/R and total sales made on credit for the time period being considered — commonly a month or quarter — you can quickly find this value.
DSO = (Average A/R ÷ Total Credit Sales) x # of days in the period being evaluated
You’ll also need to identify the idealized value for this metric, or your best possible days sales outstanding (BPDSO). Essentially, this KPI projects what your DSO would be if everything proceeded smoothly and there were no delays or issues with your collections.
BPDSO = (Current A/R ÷ Total Credit Sales) x # of days in the period being evaluated
Average days delinquent formula
Once you know those two figures, it becomes rather easy to calculate your average days delinquent:
Average Days Delinquent = Days Sales Outstanding – Best Possible Days Sales Outstanding
Average days delinquent example
Let’s take a moment to look at the A/R performance of Mackinac Island Nautical Umbrella Solutions (MINUS). A regional manufacturer, MINUS produces the bulk of patio and deckchair umbrellas used by the finest yachts, fishing boats, and garbage scows based on exotic Mackinac Island, Michigan. Thanks to the balmy 23°F average temperatures towards the end of 2024, MINUS had a booming holiday season.
Unfortunately, in December, the organization had a corresponding drop in the timeliness of customer payments, ballooning its DSO to 82 days — a marked increase over the previous month’s total of 60 days. At the same time, the manufacturer’s BPDSO remained relatively constant across November and December, netting 31 and 32 days respectively.
Noting a higher-than-average DSO, the firm wanted to reevaluate the performance of a new dunning strategy it had put in place in early December. Fortunately with its days sales outstanding and best possible days sales outstanding both available, MINUS could quickly calculate its ADD:
ADD (December) = DSO – BPDSO = 82 days – 32 days = 50 days
ADD (November) = 60 days – 31 days = 29 days
Given that MINUS now knew its ADD and DSO for the past two months, the firm could evaluate both of these figures in context. And as both metrics trended upwards, MINUS was able to determine that the problem was indeed related to its collection efficiency and likely tied to the new dunning program.
4 ways to improve ADD
1. Keep talking
Your customers should never be surprised when learning how much they owe you or when they owe it. Instead, these details should be included in every touch with the buyer, from the initial purchase order to the delivered invoice to the final receipt. Similarly, you’ll also want them to be well aware of your payment terms and any potential bonuses for early closing or penalties for late closing — ideally, making them familiar with these guidelines before an order is even placed.
Even more important, this information should be prominently displayed on all of these documents in an easily understood format.
2. Embrace automation
To accelerate your invoicing efforts, you should also consider putting in place a centralized billing platform, like our Accounts Receivable Automation software. With your workflows now automated, you can keep your billing efforts moving whether your staff are in the office or not, avoiding unnecessary delays. And with common, standardized processes in place, you can more easily identify and neutralize any bottlenecks that could be artificially inflating your DSO or ADD.
Similarly, you’d be wise to automate your collections efforts as well, something our Smart Chasing feature can do quickly and easily.
3. Know your customers
Part of minimizing the time associated with delinquent payments is to avoid these challenges in the first place. As such, you should put in the effort — if feasible — to familiarize yourself with the financial health of any new or existing customers. Run credit checks or review financial reports to determine how stable their organization is. And if a buyer seems risky, offer alternate payment terms or require full or partial payment upfront. Not only will these measures help improve your ADD, but you’ll likely also be able to avoid incurring additional bad debt.
Of course, if you deal with high sales volumes, you may not have the staff in place to support this level of personalized attention. However, if your A/R solution offers comprehensive reporting functions — like ours does — you can create targeted reports that monitor the relevant metrics that let you track overall efficiency and identify problem areas.
4. Resolve disputes quickly
It should come as no surprise that disputes are another common reason why customers might delay their payments or offer partial ones. But if you put in place measures that allow buyers to report issues easily and if you actually monitor these reports, you can often resolve any concerns well before the due date for the relevant invoice passes.
That’s one of the reasons why we’ve included a self-service portal within our solution. Not only can buyers update their payment information — another potential cause for payment delays — from this site without human intervention, but they can also directly notify you of any problems with their delivered goods or services, allowing you to respond quickly.
Invoiced: Simplify accounts receivable with automation
Ultimately, knowledge is power. So choose to be powerful with our Accounts Receivable Automation software. By leveraging our platform you can easily track, adjust, and improve your ADD, DSO, and all other manner of acronymed KPIs.
Of course, our solution also offers many other advantages, like comprehensive integration, AI-powered cash matching, and global payment capabilities powered by Flywire software, which makes it easy to do business in over 140 global currencies.
Schedule a demo today and see what we can accomplish together.
