The determination of the duration it takes for a business to receive payments owed by its customers is a crucial metric for assessing financial health. This computation, expressed in days, involves dividing accounts receivable by average daily sales. For example, if a company has $100,000 in accounts receivable and its average daily sales are $2,000, the result would be 50 days.
Understanding this timeframe provides valuable insight into the efficiency of a company’s credit and collection policies. A shorter duration indicates prompt payment from customers and efficient cash flow management. Conversely, a longer duration could signal issues with collection efforts or customer solvency. Historically, businesses have used this indicator to benchmark performance against industry standards and identify potential problems before they escalate.
