How to Use Liquidity Metrics to Measure Days Sales in Receivables
A company can use the days sales in receivables metric to calculate the number of days it takes for the company to finish collecting the money a customer owes it. When a company sells a product and the person who bought it doesn’t pay right away, the money that the company will collect in the future is called a receivable.
The metric days sales in receivables looks like this:
To use this equation, follow these steps:
Find gross receivables in the asset section of the balance sheet and net sales near the top of the income statement.
Divide net sales by 365 (the number of days in the year).
The number you get is the average amount of income after costs that the company is making per day in a given year.
Divide the gross receivables by the answer from Step 2 to get the number of days on average it took the company to collect a single receivable.
Because the company knows how many sales it made during a year and what percentage of those sales were receivables meant to be collected in the future, it can figure out the average receivables per year. As the value of this ratio goes up, the company is taking longer to collect its money. If it goes down, the company is collecting its money faster.
Although any sale made on credit becomes a receivable, companies usually collect money for cheap products very quickly. Thus, this particular metric is really meant more for companies that sell very expensive products that require multiple payments, like machinery or vehicles. These companies like to plan ahead so they don’t spend too much money making inventory before they collect on their existing sales.