What is the value of receivables in cash flow management?

Reading time: 4 min.
Receivables or account receivables refer to the amount of money due to a company for the provision of services.

Receivables are part of the assets of a company. They count as liquidity and are therefore particularly important for financing the operative business. Here we show you exactly what they are and how they can be used to calculate important key figures.

Receivables in business: Definition

Receivables or account receivables refer to the amount of money due to a company for the provision of services. These are open invoices that the company's customers have to pay because they have used a service.

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Are receivables debit or credit?

Accounts receivable are recorded on the balance sheet as an asset, as they represent a part of the company's assets. They can be considered as loans that the company has made and will be repaid at a certain point in time.

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Payables and receivables: The difference

Accounts receivables are offset by accounts payables. These belong to the liabilities and are also shown as such on the balance sheet. Accounts payables are the open invoices that a company still has to settle with its business partners because it has used a service.

What are accounts payables for one party are accounts receivables for the other party - and vice versa.

Receivables in accounting & how to use them

Receivables are recorded in accounting so that you can see at a glance how high the receivables are. At the end of the business year, the accounts receivable are added up and recorded in the balance sheet. The total then represents the total amount that the customers or business partners still owe the company.

Accounts receivable are counted as liquid assets of a company because they have a short maturity (because invoices are usually settled within a few weeks or months). If the company receives payment when a customer settles his invoice, a positive cash flow is generated in the direction of the company. The related account receivable is then closed.

Accounts receivable show part of the company's liquidity. With the help of key figures, the receivables can also be evaluated and analysed. This subsequently gives the company the opportunity to optimise its liquidity.

Account receivable formulas

With the help of account receivables, important insights into the financial structure of a company can be gained. Several key figures are calculated for this purpose.

Accounts receivable turnover ratio

The accounts receivable turnover ratio indicates the efficiency with which a company can convert its accounts receivable into cash:

Accounts receivable turnover ratio = Net credit sales / average accounts receivables

Net credit sales and average accounts receivable are shown in the balance sheet. They therefore refer to the period of one year.

With this you can now calculate the turnover in days:

Accounts receivable turnover in days = 365 / accounts receivable turnover ratio

Days sales outstanding

The above formulas can also be written differently to obtain the days sales outstanding (DSO):

Days sales outstanding = Average accounts receivables / Net credit sales x 365

Account receivable example

Within one business year, one company had a turnover in the amount of At the beginning of the financial year the accounts receivable from the previous period amounted to £20,000. At the end of the financial year they amount to £10,000.

Let us now analyse these key figures.

First we calculate the average accounts receivable and net credit sales:

Average accounts receivables = (£20,000 + £10,000) / 2 = £15,000 Net credit sales = £100,000 - £20,000 = £80,000

Now we can calculate the accounts receivable turnover ratio: Accounts receivable turnover ratio = £80,000 / £15,000 = 5.33

Based on the days of the year: Accounts receivable turnover in days = 365 / 5.33 = 68.48

On average, the company waits 68.48 days until customers pay their bills. The days sales outstanding also indicate the same:

Days sales outstanding = £15,000 / £80,000 x 365 = 68.44

Why are cash and receivables so important for a company?

Accounts receivable are a part of the liquidity that is converted into cash in the short term. They thus contribute to financing the operative business. In this context, it is important that the revenues flow into the company as quickly as possible. This means that customers should pay their invoices as early as possible.

By analysing days sales outstanding, you get an idea of how long it takes on average for customers to pay their bills. The lower the days sales outstanding, the better for the company, because the revenue is available as cash more quickly.

If the value for days sales outstanding is very high, cash shortages can occur. In this case, the company should take measures to reduce the days sales outstanding. One simple way to do this is to shorten payment terms.

What is a good value for accounts receivables days?

The value a company should aim for for accounts receivable days or days sales outstanding depends strongly on the industry. In e-commerce, values are usually less than 30 days, while in the industrial sector they can be 60 days or more.

If a company wants to assess whether its accounts receivables days are too high, it should compare itself with other companies in the sector. This will give them a good idea of what is a common value in their industry and whether their own value is above or below the industry average.


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