When average days to collect (ADC) matters for hardware companies

KPIs are critical for tracking and improving billing and collections performance in Accounts Receivable (A/R) across every industry. At hardware companies, top performing Finance teams monitor both average days to send (ADS) and average days to collect (ADC).

ADS is the number of days it takes a company to send invoices. ADC is the number of days it takes for an invoice to be paid. More specifically, ADC is the average number of days between when an invoice is sent to a customer and when full payment is received for that invoice. Together these are the two steps to turn assets into cash.

ADS is the more complex metric to determine, but often more important for HaaS companies because ADS can be worth 18x as much to the business as ADC. Start by examining your average days to send—it’s the metric you have more control over, and is likely to make a bigger difference in expediting collections.

When you’ve optimized ADS, it’s worth assessing ADC. Average days to collect is one piece of the puzzle in improving hardware-as-a-service billing. ADC is useful for benchmarking A/R performance, assessing customer credit risk, optimizing the collections process, and improving cash-flow management.

The difference between ADC and days sales outstanding (DSO) 

ADC sometimes gets conflated with days sales outstanding (DSO), which is a commonly-used metric in the world of banking and private equity. DSO provides a generalizable formula that can be applied to any time period. But while DSO is a reliable yardstick for gauging the overall health of A/R, it doesn’t provide the complete picture for operators.

DSO is a high-level and fast way to estimate A/R performance for a given window. It’s your accounts receivable balance divided by your total credit sales, multiplied by the number of days in the period you’re looking at—and it’s a good approximation to report to external stakeholders like banks or investors so they can quickly grasp your business. But DSO ultimately provides the team with only one number, which isn’t much to work with.

Where DSO is more relevant for external stakeholders, ADC is more relevant for internal teams to understand more detailed and actionable information about the business. That’s because ADC provides a more granular view of collection efficiency. Since ADC accounts for the specific invoicing and payment dates of individual invoices, HaaS companies can use this metric to identify particular areas where collections can be improved. Operating a capable and efficient A/R team requires looking at ADC.

Finance teams can easily slice ADC by customer, product type, invoice size, geography, and more. Comparing ADC across payment terms provides insight into business performance relative to customer commitments. How does the ADC for high-dollar invoices compare to low-dollar invoices? How does the ADC for customers in Canada compare to customers in Germany?

With ADC, unlike DSO, the A/R team can begin to understand important, actionable trends in customers’ payment activity. And it’s not a complicated metric: You could run a weekly A/R aging report or quickly analyze your invoices with a manual export. At the company level, ADC is typically similar to DSO, though ADC benchmarks vary by industry. For HaaS businesses, ADC is generally 40–70 days, depending on the size of your buyer.

Benefits of tracking ADC

Tracking average days to collect allows Accounts Receivable to:

1. Benchmark collections performance. Comparing ADC against internal and HaaS industry benchmarks provides insight into how well you’re performing.
2. Assess credit risks. Changes in ADC might signal customer difficulty in making timely payments.
3. Optimize collection processes. Regularly monitoring ADC allows you to identify inefficiencies in your own followup process.
4. Take smarter actions. With ADC by individual customer, collections can action each differently—and intelligently—to optimize cash while minimizing work.
5. Improve cash flow management. The moment ADC increases, you can proactively resolve issues.

How to lower your ADC

A high ADC negatively impacts cash flow and financial health. Outstanding invoices mean cash is in limbo in A/R rather than available to the business. A low ADC generally means good health for your customers and collection processes, and can indicate a strong handoff from Sales to Customer Success and Finance.

If you’re looking to lower your organization’s ADC, consider:

• Improving customer communication (regularly communicating with customers about their account status and upcoming due dates)
• Analyzing customer payment history (to proactively identify slow-paying customers)
• Automating invoicing and collections processes (to minimize delays and ensure followups)
• Establishing clear policies and penalties on late payments (if this is an issue for your business)
• Offering early payment discounts and incentives (only if necessary)

Automating invoicing and collections is usually a hardware-as-a-service Finance department’s biggest opportunity when it comes to ADC. That’s because a good invoicing system not only allows for streamlined and prompt billing; it also supports automated follow-ups on late payments.

A more important metric than ADC for HaaS: average days to send (ADS)

Luckily for finance teams in hardware-as-a-service (HaaS), even basic invoicing software allows you to easily export and calculate ADC (it is easy enough to calculate that you don’t even need software). ADC’s sister metric, ADS, is more complex to determine but is more important for HaaS companies because a business can usually get much more value out of improving average days to send.

That’s why attending to your ADS first is the best approach for A/R teams focused on hardware-as-a-serving billing. ADC might be easier to calculate, but it’s the harder metric to optimize because it’s much less in your control. ADS—while more difficult to track—is the easier metric to optimize because it’s usually controllable.

Software doesn’t calculate ADS if it’s not built for invoicing HaaS. That’s why we created Hardfin. Hardfin helps hardware-as-a-service (HaaS) businesses turn assets into cash as quickly as possible by natively linking assets to billing.

Want to start measuring and improving your billing operations? Reach out to talk to one of our experts. We’d love to chat with you.

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