What does the days receivable ratio measure?

The days receivable ratio is a financial metric that specifically measures the average number of days that a company takes to collect payments from its customers after a sale has been made. This ratio provides insights into a company's efficiency in managing its accounts receivable and its ability to convert sales into cash flow.

A lower days receivable ratio indicates that a company is able to collect its receivables quickly, which is generally favorable for maintaining liquidity and ensuring the availability of cash for operations. Conversely, a higher ratio could suggest inefficiencies in the collections process or potential issues with credit quality of the company’s customers.

Understanding this metric is vital for businesses as it directly impacts cash flow management and overall financial health. It helps investors and management assess how well the company is performing in terms of credit policies and collection efforts. Therefore, it is essential to focus on the average number of days invoices are outstanding, which is exactly what this ratio measures.