Number of days’ sales in receivables ratio

Definition

The number of days' sales in receivables ratio measures the average number of days it takes a company to collect its accounts receivable. It is an indicator of the efficiency of a company's credit and collection policies.

5 Must Know Facts For Your Next Test

1. The formula to calculate the number of days' sales in receivables is (Accounts Receivable / Net Credit Sales) * 365.
2. A lower ratio indicates that a company is collecting its receivables more quickly, which is generally favorable.
3. A higher ratio might suggest issues with credit policies or difficulties in collecting payments from customers.
4. This ratio is also referred to as days' sales outstanding (DSO).
5. It is important to compare this ratio with industry standards to determine if a company's collection period is competitive.

Review Questions

Related terms

Accounts Receivable Turnover Ratio:

Measures how many times a company collects its average accounts receivable during a period.

Net Credit Sales:

Total revenue from goods or services sold on credit, minus returns and allowances.

Aging Schedule:

A report that categorizes accounts receivable based on the length of time an invoice has been outstanding.