Days Sales in Receivables

Accounts Receivable is the amount of money a company is due to receive. This may be due to pending payments, sales on a credit basis, etc. A company needs to monitor its Accounts Receivable as it is a source of cash inflow for the company.

• Accounts Receivable is indicated as an asset in the balance sheet of the company and is expected to turn in cash over a year.
• A large Accounts Receivable indicates a lack of efficiency of the company to receive its dues, this can have an adverse impact on the cash flow of the company.

Number of Days Receivable

• This gives an idea about the average number of days taken to receive the receivable by a company. This is also known as day’s sales outstanding or days in receivable.

Number of Days Sales in Receivable	=	Average Accounts Receivable
		Average Day's Sales on Credit

Average Day's Sales on Credit	=	Sales on Credit
		365

Managing Accounts Receivable

There are various ways to manage a healthy Accounts Receivable in a company as explained below:

Credit Policy

• Sales on credit form a major chunk of the Accounts Receivable. Companies extend credit facilities to customers to ease of transaction and build a strong credit relationship between the company and the customer. However, a company must have a credit policy in place with the following points:
1. The company should track the creditworthiness of the customer by tracking his previous transactions, this will give a clear view of the customer’s credit practices
2. The company should have a credit limit in place depending upon the degree of risk it can take. A new company should not give high credit to a customer as it will have an adverse impact on its cash flows, while an old company may have higher credit limits.
3. The company should have a credit policy in place that would require a customer to have a certain level of financial stability before availing the credit facility of the company

Payment Terms

• A company must have various payment terms depending upon the types of payments due, few of them are listed below:
1. Normal Terms: This is the most common payment term in which the customer must make payment within a pre-defined timeline mentioned on the invoice, beyond which a penalty will be levied.
2. Cash on Delivery: This method has the provision for collection of payment simultaneously with the delivery of the product, failing which the product will not be delivered.
3. Cash Before Delivery: This method requires the payment to be done before the delivery of the product is scheduled. This is also known as Pre-Paid Order
4. Bill to Bill: This method requires the customer to clear the previous bill before the next product is scheduled.
5. Monthly Billing: This method involves monthly payment of dues to a company. Payment before the due date involves a discount to attract customers to make early payments.

Payment Modes

Providing customers to pay through various paying modes may help to clear the dues fast. Many a time due to various rigidities customers are not able to pay through normal modes (cash), the company should include various payment options to provide ease to the customers, few of them are mentioned below:

1. Online Payment via Payment Gateway (Electronic Cards, Net Banking, etc.)
2. Point of Sales (POS)
3. Pay through Check Option
4. Equated Monthly Instalments (EMI)
5. Direct Debit Facility (Direct Deduction from the account of customers)