Financial Analysis: Days’ Sales in Receivable Example

Days’ sales in receivables is a very important ratio because it tells how many days, on average, it takes to collect from customers. It is really a variant of the Accounts Receivable Turnover Ratio, although more widely used than A/R Turnover Ratio. It also has a few other common names like “day’s sales outstanding” or DSO, or “average collection period” (or ACP). Days’ Sales in Receivable is a measure of efficiency. The formula to calculate Days’ Sales in Receivable has two parts. Often students stop after the first part. Please don’t do that. The first part is Net Sales Revenue divided by 365 days, if you are calculating this using annual data. This gives us the average one-day’s sales.

The second part is taking average net accounts receivable and dividing it by the average one day’s sales calculated in part 1. This gives us the days’ sales in receivables. I’ve highlighted Net Sales Revenue. We’re going to use that information to determine the average one day’s sales. Additionally, we need some information from the current assets section of the Balance Sheet. I’ve highlighted two years’ worth of net accounts receivable balances. For 2016, part 1 gives us average one day’s sales of $257.53. In part 2 we divide the average net A/R by the one day’s sales to get 3.3 days. On average, we collect our accounts receivable every 3.3 days. Which is a little too good to be true. This is probably a business that has a lot of cash sales rather than sales on account. Regardless, we would look to compare the results to our credit terms, let’s say 30 days, and see if the company is doing better or worse at collecting, than terms..

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