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Understanding Account Receivable Days

Account Receivable Days indicate the average number of days a company takes to settle invoices. It refers to the amount of money owed to the company by its customer. Account receivables days are calculated as 365 days divided by the account receivable turnover ratio. Investors used this metric to analyze the average number of days it takes for the company to receive payments due for its sales.

The formula to derive Account Receivable Days

Account Receivable Turnover Ratio - It measures the number of times a company collects its receivables. This ratio indicates how well the company accumulates its due receivables. It is calculated as Net Sales divided by Average Account Receivables.

Example Account Receivable Days: For the financial year, Page Industries reported an Account Receivable Turnover Ratio of 13.65.
The value as per the formula (365 Days / Accounts receivables Turnover Ratio) is calculated as [365 (Days) / 26.75] = 13.65.

Key Highlights
Account receivable days indicate the company's efficiency in collecting outstanding invoices.

It is calculated as 365 days divided by the account receivable turnover ratio, which indicates the number of times a company collects its receivables.

While doing analysis, always compare companies that operate in the same industry and have a similar business model and revenue as account receivable days differ from industry to industry.

While looking at the Account Receivable Days, the following points should also take into consideration:
The lower number of days is considered good. It indicates that the company is taking less time to receive its payments.

A high number of account receivables days indicates that the company is taking a lot of days to convert its sales into cash, but it depends upon the industry. If the particular company is taking a maximum number of account receivables days, it does not mean it is bad. Investors should check the factors behind it, as account receivable days vary from one industry to another. But a high number of account receivables days may also cause a cash flow problem.

The account receivable days metric is helpful to get insight into the overall company's efficiency in collecting its outstanding invoices. As the example shown above, Page Industry account receivable days are 13.65, which means it takes 13.65 days to convert its sales into cash.

The account receivable turnover ratio and account receivable days used the same financial information. By dividing 365 days by the account receivable turnover ratio, we get the number of account receivable days.

How to use Account Receivable Days effectively
Investors should look for companies that take a minimum number of account receivable days. It indicates that the company is quickly converting its sales into cash and the company has a chance to put that cash to use again.

While doing analysis, always compare companies that operate in the same industry and have a similar business model and revenue. Because the number of account receivable days often differs from industry to industry.

While doing analysis, also look at other relative ratios with account receivable days such as Inventory Turnover Ratio, Account Receivable Turnover Ratio, Days in Working Capital, etc.,

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