Accounts receivable is an important aspect of any business, as it represents the amount of money that is owed to a company by its customers. One key metric that measures the efficiency of a company’s credit and collection policies is receivable days, also known as days sales outstanding (DSO). In this article, we will discuss what receivable days are, why they’re important, and how to calculate them.

What are Receivable Days?

Receivable days, or DSO, refers to the average number of days it takes a company to collect payments from its customers after a sale has been made. This metric helps businesses assess the effectiveness of their credit and collections policies and identify potential cash flow issues.

Why are Receivable Days Important?

Receivable days are crucial for several reasons:

1. Cash flow management: A shorter DSO means that a business can collect payments more quickly, which can positively impact cash flow.

2. Assessing credit risk: Monitoring receivable days can help a company detect any potential credit risks and take necessary actions to mitigate them.

3. Benchmarking performance: Businesses can use their DSO figures to benchmark their performance against industry standards or competitors’ receivables management strategies.

How to Calculate Receivable Days

Calculating receivable days involves three main steps:

1. Calculate average accounts receivable: The first step is to determine the average accounts receivable during a specific period. This can be done by adding the beginning and ending accounts receivable balances and dividing the sum by two.

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

2. Calculate net credit sales: Net credit sales are the total sales made on credit during the same period, minus any returns or allowances.

It’s essential to exclude cash sales since they don’t contribute to accounts receivable.

Net Credit Sales = Total Credit Sales – Sales Returns and Allowances

3. Compute receivable days: Finally, divide the average accounts receivable by net credit sales and multiply the result by the number of days in the period (usually 365 days is used).

Receivable Days = (Average Accounts Receivable / Net Credit Sales) x 365

Example:

Let’s say a company has the following figures for a year:

Beginning Accounts Receivable: $15,000

Ending Accounts Receivable: $25,000

Total Credit Sales: $250,000

Sales Returns and Allowances: $10,000

Here’s how to calculate receivable days:

1. Average Accounts Receivable = ($15,000 + $25,000) / 2 = $20,000

2. Net Credit Sales = $250,000 – $10,000 = $240,000

3. Receivable Days = ($20,000 / $240,000) x 365 ≈ 30.42 days

In this example, it takes the company an average of approximately 30 days to collect payments from customers.

Conclusion

Understanding and calculating receivable days can help businesses improve their credit control practices and cash flow management. By regularly tracking this key financial metric, companies can make more informed decisions about their credit policies and collections strategies.