AR/AP Days: Like a Good Jazz Solo-It’s All About Timing
You’re a few months into a good year—clients are happy, business is moving. Then the bills come due, and something’s off. You’ve paid your suppliers, but your customers are still holding onto their payments. Suddenly, you’ve got a cash flow problem. That’s where AR Days vs AP Days comes in. Measure and manage this, and you’ll stay ahead of potential issues. Leaders need to track these numbers weekly—it’s the heartbeat of your business. A phrase I picked up at PacificCoast Banking School sticks with me: “Profits cure a lot of ills, but cash flow pays the bills.”
What is AR vs AP Days?
Accounts Receivable (AR) Days: The average number of days it takes for your customers to pay.
Accounts Payable (AP) Days: The average number of days it takes for you to pay your suppliers.
Why Does This Matter?
AR Days < AP Days: Great! You’re collecting faster than you’re paying—cash flow is solid.
AR Days > AP Days: Not so great. You’re paying your suppliers faster than you’re collecting from customers, which could lead to cash flow issues.
What You Need to Do:
Get your AR Days and AP Days.
Compare:
If AR Days < AP Days, keep doing what you’re doing.
If AR Days > AP Days, try these options to fix it:
Track collections: Set a process to follow up on payments within 5 days. Call the day before it's due, then daily after the due date until it’s paid. Keep track of those calls.
Offer early payment incentives: If it works for your business, offer a 1-2% discount for early payments. But don’t feel obligated if it doesn’t fit.
Revise payment terms: Tighten terms with customers if you're waiting too long (e.g., 30 days instead of 60).
Negotiate supplier terms: Talk to your suppliers about extending their terms to match your cash cycle.
Bottom line:Managing these numbers well is good stewardship—ensuring that your cash flow is in alignment allows you to better fulfill your mission, invest wisely, and grow your business for the long-term.
You'll be able to manage your finances alongside other key business metrics in the Unbreakable Operating System (UnbreakableOS™) app coming soon.
