If you were to plot the time it takes between invoices to be sent and for them to be paid on a graph, it could look like a city’s skyscrapers! This is because this period varies wildly based on the company paying them. To get a feel for the average time you would wait for payment, use this formula: Accounts receivable balance times 360 divided by Sales on credit times 12.
For example…
Let’s say Mary runs a piano tutoring business. She invoices her clients – schools, libraries and individual people on a monthly basis. Most schools and libraries pay within a week of the invoice, but the others, along with her individual clients can sometimes take up to another month. If her accounts receivable balance is $10,000 and her sales on credit is $5000, her average collection days would be 10000 times 360 divided by 5000 times 12, which is 60 days. Hmmm, that is a long time.
