Days sales in receivables index (DSRI) is a financial ratio that measures how long it takes for a company to collect cash from its credit sales. It is one of the components of the Beneish M-Score, a mathematical model that detects earnings manipulation by comparing various financial ratios. A high DSRI indicates that the company may have inflated its revenue by recording sales that are not likely to be collected, while a low DSRI suggests that the company has a fast and efficient collection process.
Formula
The formula for DSRI is:
![\[DSRI = \frac{(Net Receivables_t / Sales_t)}{(Net Receivables_{t-1} / Sales_{t-1})}\]](https://excelcalculations.refrigeratordiagrams.com/wp-content/ql-cache/quicklatex.com-bc19f109dc4e4db13f9ab1e30faba37e_l3.svg "Rendered by QuickLaTeX.com")
where:
- is the net accounts receivable at the end of the current period (year, quarter, or month)
- is the net credit sales during the current period
- is the net accounts receivable at the end of the previous period
- is the net credit sales during the previous period
Note: If the net receivables or net credit sales are not available, you can use the total accounts receivable or total sales instead, but this may affect the accuracy of the ratio.
Calculation
To calculate DSRI in Excel, you need to have the following data:
- Net accounts receivable at the end of the current period ()
- Net accounts receivable at the end of the previous period ()
- Net credit sales during the current period ()
- Net credit sales during the previous period ()
You can enter these data in separate cells, such as A2, A3, B2, and B3, respectively. Then, you can use the following formula in another cell, such as C2, to calculate DSRI:
=(A2/B2)/(A3/B3)
Example
Suppose a company has the following data:
- Net accounts receivable at the end of 2023: $50,000
- Net accounts receivable at the end of 2022: $40,000
- Net credit sales during 2023: $200,000
- Net credit sales during 2022: $180,000
We can enter these data in Excel as follows:
| A | B | C | |
|---|---|---|---|
| 1 | Net Receivables | Net Credit Sales | DSRI |
| 2 | 50,000 | 200,000 | =(A2/B2)/(A3/B3) |
| 3 | 40,000 | 180,000 |
The result is:
| A | B | C | |
|---|---|---|---|
| 1 | Net Receivables | Net Credit Sales | DSRI |
| 2 | 50,000 | 200,000 | 1.11 |
| 3 | 40,000 | 180,000 |
This means that the company’s DSRI is 1.11, which indicates that it took longer to collect cash from its credit sales in 2023 than in 2022.
Interpretation
The DSRI can be interpreted as the number of times the average collection period has changed from one period to another. For example, if the DSRI is 1.5, it means that the average collection period has increased by 50% from the previous period. Conversely, if the DSRI is 0.8, it means that the average collection period has decreased by 20% from the previous period.
A high DSRI may indicate that the company is facing difficulties in collecting cash from its customers, or that it has recorded sales that are not likely to be collected. This may signal earnings manipulation, as the company may have inflated its revenue and accounts receivable to boost its financial performance. A low DSRI may indicate that the company has a fast and efficient collection process, or that it has offered discounts or incentives to encourage customers to pay earlier. This may signal earnings quality, as the company may have a higher cash flow and lower accounts receivable.
However, the DSRI should not be used in isolation, as it may be affected by various factors, such as the industry, the seasonality, the credit policy, and the accounting methods of the company. Therefore, it is important to compare the DSRI with the industry average, the historical trend, and the other components of the Beneish M-Score, such as the gross margin index, the asset quality index, and the total accruals to total assets.
