What is Days Sales in Accounts Receivable?
Accounts receivable are amounts of money owed to a business by customers for sales made to them on credit. By dividing the outstanding receivables by the average daily sales value, an estimate can be obtained for the number of days sales in accounts receivable. The accounts receivable formula is as follows:
The days sales in accounts receivable should not normally exceed the credit terms a business offers its customers as this means that account receivable collections are not operating efficiently.
For a business operating with credit sales, the value of day sales outstanding would usually be in the range of 30 – 60 days. A predominately cash based business would have a much lower number of day sales outstanding.
The ratio is an important indicator as any upward trend means that an increasing amount of cash is needed to finance the business, this can be a major problem for an expanding or possibly over-trading businesses.
The days sales in accounts receivable is sometimes referred to as accounts receivable turnover ratio in days, debtor days, or day sales outstanding.
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