Days Receivable Outstanding

How is it calculated?

Days Receivable Outstanding = 365 / Accounts Receivable Turnover Ratio

Goal of the Ratio

The goal of this ratio is the same as the Accounts Receivable Turnover Ratio; however rather than expressing the ratio as how many times a borrower’s accounts receivable turns over each year (extended, collected, extended, collected), the ratio is divided into 365 days to show how many days worth of accounts receivable the borrower has on hand (ie - average number of days it takes a customer to pay its bill).  Many times this expression is much easier for people to grasp and understand even though the end goal of the ratio is the same as the Accounts Receivable Turnover Ratio.

When is it used?

This ratio is used when the borrower has a high degree of accounts receivable.   

Rules of Thumb

There is no rules of thumb for this ratio, but rather this ratio should be viewed in the context of what is typical for the industry.  

What changes in the ratio could mean:

Some example reasons why the Days Accounts Receivable On Hand can change:

Increases

1. The borrower extended the credit terms they offer to their customers
2. The borrower is experiencing a recent increase in revenue
3. The borrower’s customers are paying more slowly 

Decreases

1. The borrower extended the credit terms they offer to their customers
2. The borrower is experiencing a recent increase in revenue
3. The borrower’s customers are paying more slowly 

Other Relevant Terms

• Capital
• Balance Sheet
• Working Capital
• Accounts Receivable Turnover Ratio
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