ABREMA: glossary: days sales in receivables

Days sales in receivables

Receivables at end of period / Average daily sales

This is one of the many ratios used by auditors in ratio analysis. As with other ratios, the auditor compares the actual value of the ratio at a point of time with the expected value of the ratio and investigates any unexpected change. To avoid the actual value of the ratio biasing the auditor's estimation of the expected value, auditors estimate the expected value before calculating the actual value.

Days sales in receivables provides an estimate of the number of days, on average, that it takes for customers to pay their account. The value of receivables at year end referred to in the ratio is equal to the net balance after deducting any provision for bad or doubtful debts; average daily sales is equal to total net sales divided by 365 (although other divisors may be used, for example, the number of working days in a year). A value of say, 63 days, indicates that customers pay their accounts, on average, 63 days after the sale is made. By itself, however, the ratio does not convey a lot of meaning. In particular, the client's terms of trade with its customers must be considered. Comparison of the ratio also provides more meaningful information. For example:

comparison of the ratio with an industry average (ensuring the method of calculating the industry ratio is the same method used to calculate the client's ratio). This comparison provides an indication of whether the client is performing better or worse than the industry as a whole. The comparison is useful when obtaining a preliminary knowledge of the client's business.
comparison of the ratio between different entities within a group. This comparison is useful when obtaining a detailed knowledge of the client's business and provides an indication of which entities may require particular attention.
comparison of the ratio this year with last year. An increase in the ratio over the previous year may be an indication that (certain) customers are taking longer to pay, or that the account balance includes amounts which should be written off or provided for; a decrease in the ratio may be an indication that credit control is more effective. This is a very common substantive audit procedure. In many businesses, this ratio remains relatively unchanged from year to year, so even a small change (e.g. from 40 days to 41 days) may require investigation.

Other ratios used by auditors include:

Activity Based Risk Evaluation Model of Auditing

Days sales in receivables