What are the Days Sales Uncollected?

The days’ sales are uncollected, also known as the average collection period. One liquidity ratio is measured to estimate the days before collecting receivables. Creditors and investors use the ratio to determine the company’s short-term liquidity. The days’ sales uncollected ratio formula measures how long it will take for customers to pay their credit card balances.

Components of Days Sales Uncollected

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Days Sales Uncollected (wallstreetmojo.com)

#1 – Accounts Receivable

Accounts receivable Accounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more is the proceeds of payments due to the company for its credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more to its customers. When a company extends credit to the customer, it provides a period to the customer for payment. As a result, the sales realize when the invoice generates.

#2 – Net Sales Net SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company’s gross sales.read more

Net sales are the company’s gross sales after returns, discounts, and allowances. Revenues reported on the income statement often represent net sales.

Days Sales Uncollected Formula

The days’ sales uncollected ratio divides accounts receivable by net sales and multiplies it by 365. One can express it as: –

The result expresses in days.

Inputs:

  • One can pick up accounts receivable data from the balance sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more.The company must provide credit sales. They rarely report in the separate head in the income statement.

Implication:

  • One can use cash for different operational activitiesOperational ActivitiesOperating activities generate the majority of the company’s cash flows since they are directly linked to the company’s core business activities such as sales, distribution, and production.read more collected sooner. With lower days sales uncollected, liquidity and cash flows tend to increase. It also depicts that accounts receivable are not bad debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more but are good.A higher ratio shows the non-suitable collection process. Also, customers are not able or unwilling to pay. As a result, such companies face problems in converting sales into cash.

Days Sales Uncollected Examples

Below are the examples of days sales uncollected as follows: –

Example 1:

Suppose ABC Ltd. is a U.S.-based company. At the end of March 2018,

  • Accounts Receivable=$400,000.Net Credit Sales=$3,600,000.

So, the days’ sales uncollected will be,

Days’ Sales Uncollected Formula = Accounts Receivable/Net Sales * 365

= 40.56~ 41 days.

So, ABC Co. will require approximately 41 days to collect the receivables.

Example 2:

Suppose Doro’s Pine Boards is a UK-based retailer offering customers credit. Doro sells inventory to customers per the credit policy, wherein customers will pay within 30 days. Some customers pay promptly, but some make a delayed payment. financial statements Financial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more have the following details: –

  • Accounts Receivable: £11,000Net Credit Sales: Net Credit Sales:Net credit sales is the revenue generated from goods or services sold on credit excluding the sales discount, sales allowance and sales return. It even amounts to the accounts receivables for a certain accounting period.read more: £131,000

=30.65 days~ 31 days

The company takes 31 days to collect cash. So, it is a good ratio similar to its set standard.

Advantages of Days Sales Uncollected

  • If a department store or any organization sells its goods and services to its customers or clients on credit, they ultimately sell more products. So, they have large accounts receivable on their books, which is a good sign for their financial performance.Apart from liquidity, the ratio can be used for management to estimate the effectiveness of credit and collection activities.It can be used as a tool for peer creditors to give products on a credit basis if one creditor finds a customer or party not creditworthy. It can work as a warning for others too.It can indicate if the company is maintaining customer satisfaction or if credit is given to customers who are not creditworthy.

Disadvantages of Days Sales Uncollected

  • A high ratio shows that the company is taking longer to collect money, which may lead to cash flow problems.Suppose a company’s payment of expenses is directly dependent on payments from accounts receivable. A sharp rise in the ratio can disrupt this flow, and one can require drastic changes.Suppose a company has a volatile days sales uncollected ratio. That may cause concern, but there is no issue if a company’s ratio dips during a particular season each year.

Limitations of Days Sales Uncollected

If we consider the efficiency of a business, days sales uncollected come with a set of limitations that are important for any investor to notice: –

  • When companies are compared based on the ratio, one must do it in the same industry to have similar business models and revenue. Companies of different sizes often have other capital structures, influencing calculations.The ratio is not useful in comparing companies with significant differences in the proportion of credit sales.The ratio is not a perfect indicator of a company’s accounts receivable efficiency, as it depends on the volume and frequency of sales. Therefore, one must use days sales uncollected along with other metrics.It only accounts for credit sales. It ignores cash sales. If they factored them into the calculation, they would decrease the ratio.

Important Points

  • Generally, days sales uncollected ratio below 45 days considers low as it depends on business type and structure. So, there is no ideal ratio.The unusually high figure depicts a casual credit policy or inadequate collection process. It could be possible because of the slow economy where customers cannot pay.Another point to consider is seasonality. The business sales may vary from month to month. So, the receivables figures in the numerator may not be a true picture of a particular period or the entire year.Also, consider the distribution. Some of the receivables could be overdue for a long time, which may impact the measurement. But, again, the notation can be useful in this regard.

Conclusion

We can conclude that days’ sales are uncollected and widely used for collections and credit management. It assists with cash flow planningCash Flow PlanningCash flow plans are those in which an insurance company assesses its income and expenses in order to maintain cash flows and also to keep cash flows above expenses. It can also refer to an individual’s plan to ensure cash liquidity in such a way that they manage their expenses while maintaining a minimum balance.read more. It is an indicator of the success of the collection department. It is largely affected by external factors like whether the client’s business is powerful or the business condition. It is very important to check the ratio as it is an indicator of the liquidity and solvency of the organizationSolvency Of The OrganizationSolvency of a company means its ability to meet the long term financial commitments, continue its operation in the foreseeable future and achieve long term growth. It indicates that the entity will conduct its business with ease.read more.

This article is a guide to Days Sales Uncollected. Here, we discuss calculating days sales uncollected formula and its formula and step-by-step examples. You may learn more about accounting from the following articles: –

  • Days Sales Outstanding FormulaWhat is Debtor Days Formula?Formula of Days Inventory Outstanding Calculate Gross Sales