06.24.2024 | Posted by Erik
What Your ADP Is Telling You About the Health of Your AR… and What To Do About It
In the world of accounts receivable (AR), it’s easy to get overwhelmed by what can seem like a flood of slow payments. This year, we’ve spoken with a number of companies that are panicking over the numbers. They’re convinced that customers are dragging their feet even more than before and their accounts receivable management is suffering as a result.
However, when we take a closer look at the data, it’s clear that things might not be as bad as they appear. The numbers don’t lie, so we decided to dig deeper—and some interesting patterns emerged. 
The key takeaway? To accurately gauge the health of your AR, make sure to consider your average days paid, average days slow, and payment terms together.
Understanding ADP and Average Days Slow
Two crucial metrics can help you better understand the health of your AR to gauge whether your accounts receivable management is running smoothly:
- Average Days Paid (ADP): Measures the average time it takes for a company to receive payment from the invoice date.
- Average Days Slow: Tracks how many days past the due date an invoice is paid.
While some accounts receivable services firms consider a company’s ADP as the single metric for gauging AR health, it’s much more nuanced than that. At Axim, we never advise looking solely at your ADP because it can easily be skewed by a number of internal factors, like:
- The payment terms
- How timely you post payments
- How timely you deposit payments
- How you apply payments (against the specified invoice vs. against the oldest invoice)
For example, if your company offers Net 60 terms, it will naturally increase your ADP compared to the more standard Net 30 terms. It’s essential to consider these elements when evaluating your ADP to avoid skewed perceptions. Looking at both ADP and average days slow while also taking your average payment terms into account can give you a more holistic understanding of your AR health.
The Numbers: May 2023 vs. May 2024
Let’s dive into the numbers we collected from our client base of over 5,000 accounts in 2023 and 2024.
| Industry | ADP 2023 | Average Days Slow 2023 | ADP 2024 | Average Days Slow 2024 |
| Company-wide | 51.49 | 9.18 | 50.90 | 7.89 |
| Apparel | 54.00 | 7.00 | 54.00 | 6.00 |
| Service | 48.00 | 20.00 | 43.00 | 15.00 |
| Logistics | 41.00 | 8.00 | 35.00 | 5.00 |
| Industrial | 48.00 | 9.00 | 51.00 | 11.00 |
While the ADP remained relatively consistent from 2023 to 2024, the average days slow improved significantly across every industry except for industrial. This discrepancy tells us that many companies might have extended their payment terms in the past year.
For example, moving from Net 30 to Net 60 naturally lengthens the ADP, even if payments are made close to the due date. But overall, the reduction in average days slow shows us that payments are becoming timelier when considering these extended terms. That’s a good sign!
The Impact of Extended Terms
Extended terms became increasingly common during the COVID-19 pandemic and its aftermath, and many companies still haven’t gone back to their pre-pandemic terms. This shift from the standard Net 30 to Net 45 or Net 60 terms can distort the economic barometer, making it seem like clients are paying slower, when in reality, the terms have just lengthened.
If your company falls into this boat, what can you do about it? Here’s what we recommend as a professional accounts receivable services provider:
1. Evaluate and Adjust Your Terms
Start by assessing the circumstances of your company’s AR and adjusting your terms if it makes sense for your organization.
If your company has extended terms, make sure to evaluate whether it’s time to revert to shorter payment periods. Keep in mind that this process involves more than just changing the due date on an invoice. You need to renegotiate terms with each client before accepting a new order. Here are some tips:
- Leverage Essential Goods: If you’re selling necessary products, you have more leeway to negotiate shorter terms. Big box retailers will be less likely to accept shortened terms if they can easily replace you with another vendor.
- Understand Your Market Position: If you’re dealing with off-priced goods or high competition, you may have less leverage—so weigh your decision carefully.
- Communicate Tactfully: Clearly state your new terms for future orders in a professional manner with plenty of advance warning in order not to alienate clients.
2. Monitor Patterns and Take Action
Keep an eye on patterns across your customer base. If you notice consistent late payments across the board, it might be time to review and improve your internal processes. Companies can often improve their ADP and average days slow by:
- Negotiating terms up front before accepting a new order
- Understanding the terms you’re agreeing to when signing a new client
- Invoicing properly according to the purchase orders
Regular Monitoring is Key to Understanding the Health of Your AR
While the news headlines might suggest a bleak picture for the general economy and your company’s AR, a closer look at the data tells a more nuanced story. By understanding and analyzing your ADP and average days slow and considering your payment terms, you can gain valuable insights into the health of your accounts receivable management and take proactive steps to improve cash flow.
Remember, it’s not just about when you get paid, but how you manage and negotiate your terms that truly matters.