This worksheet from Sableport Capital Group in DeLand, Florida explains the average daily balance method, works it by hand for three invented businesses, shows how a line of credit can charge monthly interest on an average daily balance, and explains how funders read the figure on statements. Every number is invented for illustration.
The Average Daily Balance Method in Four Steps
- List the ending balance for every day of the period, including weekends and holidays, when the balance carries over from the last business day.
- Add the daily balances together.
- Count the days in the period.
- Divide the total by the number of days.
A shortcut gives the same result: multiply each balance by the number of days it held, add those products, and divide by the days in the period. The shortcut is what the examples below use.
Average Daily Balance Calculator: A Cafe's Month
Illustration only, invented figures: a cafe's account ends each day at $8,200 for ten days, $5,400 for ten days after a produce and payroll week, and $11,600 for ten days after a catering payment. The daily balances total $252,000 over 30 days, an average daily balance of $8,400 (our arithmetic).
The month's closing balance, $11,600 in this invented case, overstates what the account held through most of the month; the average tells a reviewer more.
Average Daily Balance Method Calculator for a Clinic Waiting on Claims
| Days | Ending balance each day | Balance times days |
|---|---|---|
| 12 | $21,500 | $258,000 |
| 10 | $9,800 | $98,000 |
| 9 | $30,400 | $273,600 |
| 31 | Average daily balance | $20,310 |
Illustration only, invented figures: the clinic's balance dips to $9,800 for ten days before an insurer payment lands. Its average daily balance for the 31-day month is $20,310 (our arithmetic), well above the dip and well below the peak.
A Salon's Thin Half-Month and What It Shows
Illustration only, invented figures: a salon holds $4,300 for 15 days and $2,100 for 16 days after a product order. Its average daily balance is $3,165 for the 31-day month (our arithmetic). A new daily debit of an invented $310 equals 9.8% of that average balance, taken every business day (our arithmetic), which shows how a fixed daily collection weighs on a thin account.
Line of Credit Interest Calculated Monthly on the Average Balance
Some lines charge interest on the average daily balance drawn during the billing cycle. Illustration only, invented figures: an average drawn balance of $19,500 over a 31-day cycle at an invented 13% annual rate costs about $215 in interest for the cycle (our arithmetic): $19,500 times 13% divided by 365, times 31.
Some funders divide by 360 instead of 365, which raises the cost slightly; read the agreement. For how a line is drawn and paid back down, see business lines of credit.
Two Pay Periods for a Landscaping Crew, Worked the Same Way
Illustration only, invented figures: a lawn crew's account holds $14,800 for 14 days after a round of commercial payments, then $6,900 for 16 days after two payrolls and a fuel bill. The balance-times-days products are $207,200 and $110,400, a total of $317,600, and dividing by the 30 days gives an average daily balance of about $10,587 (our arithmetic).
The lower stretch lasted longer than the higher one, so the invented average sits nearer the low balance than the high one. A partner reading this invented crew's statements would test a new payment against the low stretch, not the average alone.
How a Funder Reads the Result on Statements
- The average daily balance for each month, set beside monthly deposits.
- The smallest daily balance in each month.
- Days with a negative balance or returned items.
- How the balance moves after payroll and supplier days.
A balance that stays well above zero through the weakest days of the month tells a reviewer the account can carry a new payment. A balance that touches zero after every payroll says the business needs a different structure or a smaller amount.
Using the Worksheet With a Cafe, Clinic or Salon's Own Statements
Take three recent months of statements, list each day's ending balance, and work the average for each month. Compare the three, and mark the smallest daily balance in each. Bring the results to a call at (386) 251-7491 or into the web form conversation; they help narrow which product fits.
Merchant Cash Advances and Daily Balances
A merchant cash advance collected by a fixed daily debit takes money out every business day, whatever the balance. Run the daily amount against the smallest balances in the worksheet before signing. Holdbacks and factors get their own walk-through on the cash advance page.
By Sableport Capital Group · Updated