The Days Receivable ratio calculates the average number of days required to collect accounts receivable. Generally, lower ratios indicate more efficient accounts receivable management. 

Consider that the longer it takes to collect receivables the greater the likelihood of collection problems (including bad debt). Additionally, longer collection times cause the level of accounts receivable to increase. These increases require additional financing (generally in the form of increased trade debt and/or increased short term bank loans).    

Shortening the accounts receivable collection time reduces financing requirements (and interest costs) while at the same time reducing the likelihood of collection problems. Accordingly, a company can improve both its profitability and rate of return on investment through more efficient management of its accounts receivable. 

In effect, the ratio starts by determining the average sales produced on a daily basis. It then calculates the number of days of average sales represented by current accounts receivable. 

By its nature, the ratio assumes that sales are generally consistent throughout the year. Accordingly, the ratio is less useful for companies that experience sales volatility during their operating cycle. Examples would include companies enjoying rapid growth in sales and those that experience seasonal sales patterns.   

Formula: 

365 / [ ( Net Sales * 12 ÷ # of months  ) / (Net Accounts Receivable + Retainage Receivable) ]

This calculation is available within the CASH|Suite Insight Application to assess financial capacity and risk.