What is the formula for average days delinquent add?

Decoding Delinquency: Understanding the Average Days Delinquent (ADD) Formula

In the realm of accounts receivable management, understanding how efficiently your company collects payments is paramount. While metrics like Days Sales Outstanding (DSO) offer a broad overview of collection performance, the Average Days Delinquent (ADD) digs deeper, exposing the average length of time invoices are overdue. This insight is invaluable for pinpointing collection bottlenecks, identifying problematic accounts, and ultimately improving your company’s cash flow.

So, what exactly is the formula for ADD, and why is it so useful?

The calculation itself is remarkably simple:

Average Days Delinquent (ADD) = Days Sales Outstanding (DSO) – Billed Period Days Sales Outstanding (BPDSO)

Let’s break down each component:

• Days Sales Outstanding (DSO): This represents the average number of days it takes a company to collect payment after a sale. A higher DSO generally indicates slower collections and potential cash flow problems. It’s a broad measure encompassing all outstanding invoices.

• Billed Period Days Sales Outstanding (BPDSO): This focuses specifically on the invoices within the standard payment terms of the billing period. It shows the collection performance within the expected timeframe. In essence, it reflects how efficiently you are collecting on-time payments.

The Magic of Subtraction: Unveiling the Delinquency Picture

The true power of ADD lies in the subtraction. By removing the BPDSO (the collection performance within the allowed timeframe) from the overall DSO (the total time it takes to collect), you’re left with the portion of the DSO attributable solely to delinquent accounts.

Why is ADD Important?

• Pinpointing Collection Issues: A rising ADD signals that accounts are consistently remaining unpaid past their due dates. This allows businesses to identify problem areas in their collection processes. Are certain departments struggling to follow up? Are specific customer segments consistently late with payments? ADD helps highlight these trends.

• Assessing Creditworthiness: ADD can serve as an early warning indicator for potential bad debts. Consistently high ADD values for specific customers might suggest they are struggling financially, allowing you to adjust credit limits or proactively work on payment plans.

• Evaluating Collection Strategies: Are your new collection strategies improving delinquency? By tracking ADD over time, you can evaluate the effectiveness of implemented changes. If ADD is declining, your strategies are likely working. If it’s rising, adjustments are needed.

• Benchmarking Performance: ADD can be compared to industry benchmarks or to your own historical performance to assess your collection efficiency relative to your peers or your own past performance.

Practical Example:

Imagine a company with a DSO of 50 days and a BPDSO of 35 days.

• ADD = 50 (DSO) – 35 (BPDSO) = 15 days

This means that, on average, accounts are delinquent for 15 days. This insight allows the company to focus its collection efforts on addressing the root causes of this delinquency and improving their overall payment performance.

In Conclusion:

While the formula for Average Days Delinquent is simple, its implications are profound. By understanding and regularly monitoring ADD, businesses can gain invaluable insights into their accounts receivable processes, proactively manage delinquency, and ultimately optimize their cash flow. It’s a small calculation that can lead to significant improvements in financial health and stability.