How do you calculate your average payment time?
By Noé Mbwang · Published on · 1 min read
To calculate your average payment time, divide the total of unpaid customer invoices by the revenue invoiced over a period, then multiply by the number of days in that period. With 20,000,000 FCFA unpaid out of 30,000,000 FCFA invoiced over 90 days, the average payment time is 60 days.
Average payment time is the number that sums up how you get paid. It takes three minutes to calculate from two amounts your accounts already know.
Which formula should you use?
Average payment time = (unpaid receivables ÷ revenue invoiced over the period) × number of days in the period.
- Unpaid receivables: the total of customer invoices not yet paid on the last day of the period, overdue ones included.
- Revenue invoiced: the total of invoices issued over the same period.
- Period: 90 days is a good compromise for an SME. Over one month, the figure moves too much.
Use amounts of the same kind: all excluding tax, or all including tax.
Worked example
Fictional example. Over the last 90 days, a company invoiced 30,000,000 FCFA. On the last day, 20,000,000 FCFA are still unpaid.
20,000,000 ÷ 30,000,000 × 90 = 60 days.
How do you read the result?
Compare it with the terms written in your contracts. If your contracts say 30 days, your clients pay on average 30 days late. That gap is money sleeping: with 10,000,000 FCFA invoiced per month, 30 days of delay tie up about 10,000,000 FCFA. The calculator does this for your own figures.
How often should you measure it?
Once a month, on the same date, with the same method. What matters is not one month’s figure but its trend. If it falls, your contracts, tracking and reminders are working.
What the figure doesn’t tell you
An average hides differences. An average of 60 days can come from all clients paying at 60 days, or from most paying at 30 and one at 200. The aging report, which sorts invoices by age, shows where the problem really is.