Question

I am having difficulty understanding the formula for days sale in receivables can you explain the rational behind it. gross receivables/(net sales /365) Thank you.

Also is there a variation where you don't divide by 365 ? thanks

Answer 1

Days' Sales in Receivable means, "How many days' sales is pending as receivable?" It shows, how fast or slow the company is, in recovering its receivables i.e. how are the credit terms of the company.

For example,

Gross Receivable = 40000 and Net Sales = 120000

In this case, Average Daily Sales i.e. Net Sales/365(or say 360 days or 12 months) will be 333.333 or 10000

Therefore, Days' Sales in Receivables will be Gross Receivable/Average Daily Sale

= 40000/333.333 or 40000/10000

= 120 days or 4 months

Denominator can be anything that represents 1 full year. Important Point is that, you need to calculate AVERAGE DAILY SALES. It can be 365 days or 360 days or 366 days.