Receivable Days Calculator

Formula first

Overview

Receivable Days, or Days Sales Outstanding (DSO), measures the average duration required for a company to convert its credit sales into cash. It represents a critical liquidity metric that evaluates the efficiency of a firm's credit policy and collection department by comparing outstanding receivables to total annual revenue.

Symbols

Variables

Days = Receivable Days, TR = Trade Receivables, Rev = Credit Revenue

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When To Use

When to use: This ratio is used when assessing a company's working capital management and the health of its cash flow cycle. It is particularly useful for internal audits of credit departments or when comparing the operational efficiency of different companies within the same industry sector.

Why it matters: A high receivable days count suggests that a firm is struggling to collect payments, which may lead to cash shortages or increased risk of bad debt. Conversely, a low count indicates efficient collection processes and a shorter cash conversion cycle, allowing the business to reinvest funds more rapidly.

Avoid these traps

Common Mistakes

• Using standard 30 days instead of 365 multiplier.
• Convert units and scales before substituting, especially when the inputs mix days, £.
• Interpret the answer with its unit and context; a percentage, rate, ratio, and physical quantity do not mean the same thing.

One free problem

Practice Problem

A manufacturing firm reports $500,000inaccountsreceivableattheendofthefiscalyear.Iftheirtotalannualrevenueforthesameperiodis$4,000,000, calculate the average number of days it takes to collect payment.

Solve for: DAYS

Hint: Divide the total receivables by the revenue before multiplying the result by the total days in the year.

The full worked solution stays in the interactive walkthrough.

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Related Formulas

References

Sources

1. Wikipedia: Days Sales Outstanding
2. Brealey, Myers, Allen, Principles of Corporate Finance
3. Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe
4. Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen
5. Kieso, Weygandt, and Warfield, Intermediate Accounting, 17th Edition
6. Ross, Westerfield, and Jordan, Corporate Finance, 12th Edition
7. Brigham and Houston, Fundamentals of Financial Management, 16th Edition
8. AQA A-level Business (or equivalent A-level Business Studies textbook)