Receivable days measures the average no of days that a company takes to collect revenue, after a sale has been made. This ratio is an index of the relationship between outstanding receivables and sales achieved over a given period of time.
When a company does credit sales, company will have debtors. There is a credit policy which specifies the no of days given for the customers to pay their amount dues. Thereby the no of days extended depend on the industry. Management should be efficient to collect its debts quickly. Actually this ratio measures the management efficiency. Because it’s important for the liquidity of the company. When the company turns the sales into cash quickly, the company gets a chance to place the cash to use again, normally to reinvest and make more sales.
When the company shortens the receivable days too much it could lose customers. Same as that if the company gives more time for the customers to pay their bills then the company might face a cash shortage. Less no of days is better for the company.
Sometimes high no of receivable days indicates the customers are dissatisfied with the company's product or service, or sales are being made to customers that are less credit-worthy, or sales people have to offer longer payment terms in order to generate sales.
Receivable Days = Closing trade receivables x 365
Revenue
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