Day’s sales in receivables
In a wider sense, receivables are the total money that customers owe to the company. Most of the companies operate on credit basis that is they give a credit period to their customers, in which the customers have to make the payment. Day’s sales in receivable are generally used in a modified form in terms of average collection period. Day’s sales in receivables convert turnover receivables to the total number of days in takes to collect payments from customer.
Day’s sales can be expressed by a very simple ratio:
Number of days to be analysed/receivables turnover
The numerator varies from company to company and is dependent on the number of days for which the receivable are being calculated.
Procedure has been described in steps for you to understand this better for your financial assignment help. Receivables turnover = sales/accounts receivables
Let us suppose a fictitious company ABC Inc. While the company was reviewing its asset management, the financial officers at the company calculated that the company made total sales of $85,000 in the last business period, out of which $25,000 was still in accounts receivable. The problem statement for the financial officers would be to calculate the day’s sales in receivables. Calculating the ratio is very easy and all you need is some data and a calculator.
· Gather all the required information that would be needed to calculate the ratio. Two basic things are required for the ratio:
Ø Total sale in the business period: $85,000
Ø Amount as accounts receivable: $25,000
· Calculate the receivables turnover. The simple formula for calculating receivables turnover is to divide the total sales by the accounts receivables.
Receivables turnover for ABC Inc. = $85000/$25,000 = 3.4
· Add the receivables turnover calculated to the formula for day’s sales in receivables.
Day’s sales in receivables = 365/3.4 = 107.35
This case has been illustrated assuming that the business period is a year long. However, different companies use different period for asset management. In such a case, number of days in a year would be replaced by the number of days in a business period.
Day’s sale in receivables is a very crucial ratio and is a measure of the efficiency of the company. In this example, the data reflects that a total payment of services rendered for 107.35 days is yet to be received the company. This means that either the company has a very flexible credit policy or the customers have faltered on their payments. The smaller the ratio, the more efficient is it. A large ratio reflects that the company has a very constricted cash flow and hence, value is not being added to the company. This ratio matters a lot for small and medium scale companies as this financial ratio is a parameter for growth rate, the larger the ratio, the smaller the growth rate of the company. A smaller ratio would mean that the company has a sustained and steady growth rate as cash flow is maintained.
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