How Good is Your Business at Getting Paid?
Once all goods and services have been delivered to a client, it’s time to collect your revenue! But how do you know if you are receiving that cash efficiently? Are your clients paying faster (or slower) than average? What can you do to speed up payments without damaging client relationships?
Answers to these questions will be explored in this and upcoming installments of Nebula Bookkeeping’s limited blog post series about payability.
First, we can investigate the question: Are your clients paying faster (or slower) than average?
Two common metrics used to evaluate business’ efficiency with revenue are the Accounts Receivable (A/R) Turnover Ratio and the Accounts Receivable (A/R) Days. Below, you can find instructions on how to calculate these metrics for your own company as well as benchmarks for some common industries in the last fiscal year.
Accounts Receivable (A/R) Turnover Ratio
Definition: This is how many times on average your accounts receivable were totally paid off by clients within the year.
General recommendations: A good ratio is around 8, and anything higher is excellent.
Industry-specific benchmarks: Here are the average ratios for a few large industries for the trailing 12 months including Q4 2024, as reported by CSI Market, a free reference website that provides a wide range of financial information on publicly traded companies. Note: Good news! The Q1 2025 ratios appear to be trending upwards, so this blog post may need to be updated mid-year.
Professional Services: 3.18
Personal & Household Products: 8.14
Educational Services: 9.32
Apparel, Footwear, and Accessory Products: 10.25
Construction Services: 10.69
What you’ll need: You can use the following to calculate your own A/R Turnover Ratio. These numbers can be found in your accounting software or be requested from your bookkeeper.
A. Sales on Credit: The amount of sales that were not immediately paid in full at the moment of purchase.
B. Sales on Credit - Returns: The amount of return refunds issued related to the credit sales.
C. Sales on Credit - Allowances: The amount of allowances or discounts issued for order quantity or quality errors relates to the credit sales.
D. Accounts Receivable - Beginning of Year
E. Accounts Receivable - End of Year
How to calculate:
Step 1: Subtract the Returns and Allowances from Sales on Credit to arrive at Net Credit Sales.
Step 2: Add the Accounts Receivable - Beginning of Year to Accounts Receivable - End of Year and divide by two to arrive at Average Accounts Receivable.
Step 3: Divide Net Credit Sales by Average Accounts Receivable.
Formula: (A - B - C) / ([D + E] / 2)
Accounts Receivable (A/R) Days
Definition: This is how many days on average it took for accounts receivable to be completely paid off by clients.
General recommendations: Many firms aim for 30 accounts receivable days as a benchmark of excellence.
Industry-specific benchmarks: Here are the average days for a few large industries for the trailing 12 months including Q4 2024, as reported by CSI Market. Note: Good news! The Q1 2025 ratios appear to be trending downwards, so this blog post may need to be updated mid-year.
Professional Services: 114.78
Personal & Household Products: 44.84
Educational Services: 39.16
Apparel, Footwear, and Accessory Products: 35.61
Construction Services: 34.14
What you’ll need: You can use the same inputs from the Accounts Receivable (A/R) Turnover Ratio section to calculate your Accounts Receivable (A/R) Days. These numbers can be found in your accounting software or be requested from your bookkeeper.
How to calculate:
Step 1: Add the Accounts Receivable - Beginning of Year to Accounts Receivable - End of Year and divide by two to arrive at Average Accounts Receivable.
Step 2: Subtract the Returns and Allowances from Sales on Credit to arrive at Net Credit Sales.
Step 3: Divide Average Accounts Receivable by Net Credit Sales and multiply by 365.
Formula: ([D + E] / 2) / (A - B - C) * 365
If you took the opportunity to calculate your own metrics and compare them against industry benchmarks, great job! This is a strong first step towards analyzing (and soon amplifying) your business’ payability.
TL; DR
You can identify how fast (or slow) your clients tend to pay your business by calculating a couple of key metrics and comparing them to industry benchmarks. Look out for future updates in this series to learn more about payability.
Want to Learn More Now?
Are you the kind of person that likes to jump ahead to the end of the book to know the ending or just a fan of quizzes? If so, you can take the whole “Payability Index” quiz here right now. You’ll receive a customized Payability Index Report in your inbox within 24 hours. Bonus: Your A/R metrics can be calculated for you as a part of your report. Re-taking this quiz periodically can be a great way to track your progress!