What is Days Sale Uncollected?
Day Sale Uncollected is the financial ratio which measures number of day companies spend to collect its accounts receivable. After making sale, business must collect the cash to support the operation. Most companies collapse due to a lack of cash rather than making losses. So it is very important for the business to keep the day sale uncollected as short as possible.
This ratio is very important as it allows management or investors to access the company’s ability to generate cash flow to support operations. Cash collect from customers is the main source of cash flow.
This ratio used only for the company which makes credit sale, it will not work for a business which uses cash sale such as a coffee shop, restaurant and so on. These kinds of businesses almost do not have accounts receivable. Customers mostly pay cash immediately, so It is not necessary to measure the day sale uncollected.
Days Sale Uncollected Formula
|Days’ Sale Uncollected = Average Receivable /Net Sale * 365
- Average receivable = (Opening AR balance + Ending AR balance)/2
- Net sale: is the total sale less discount, sale return, and allowance
Days Sale Uncollected Example
Company ABC manufactures and sells bikes to the Asia market. As the whole seller, the company’s sale mostly on credit. Based on the financial statement, ABC has accounts receivable of $ 300,000 at the beginning of the year and it increases to 400,000 at the end of the year. During the year, net sale is equal to 800,000. Please calculate days’ sales uncollected.
Average accounts receivable = (300,000 + 400,000)/2 = 350,000
Days’ sale uncollected = (350,000/800,000) * 365 = 159 days
It means the company spend 160 days on average to collect the money from customers.
Advantage of Days Sale Uncollected
- It one of the ratios which help investors to access the company’s ability to collect cash to support operation.
- The ratio allows us to compare one company to another company.
- Lower value means the company can collect money faster while the higher value means they need more time to collect money.
- The ratio is easy to calculate and does not require any complicated data.
Disadvantage of Days Sale Uncollected
- Using this ratio means we evaluate a company’s liquidity base on how fast they collect money from customers. In reality, it just one source of the company’s cash flow, company can use other sources of cash flow to support their business such as debt or equity.
- It will not work properly for the company who generate fluctuate sales during the year. The amount of average accounts receivable is not reflected in the annual sale.
- A few bad debts will impact the whole ratio if the company does not write off.