It can also be used to compare the Debtor days of the same company on a historical basis. Average Collection Period can be calculated by using these formulas: Average Collection Period Formula= 365 Days /Average Receivable Turnover ratio; Average Collection Period Formula= Average accounts receivable balance / Average credit sales per day; The first formula is mostly used for the calculation by the investors and other professionals. So the ratio will help you see if you have a good customer base. From the following information, calculate the average collection period. opening debtors 18000 Your company should maintain customer satisfaction by providing an appropriate amount of credit limits and timelines for repayment. you are also required to comment on the result. In that case, average collection period will be 55 days. It is worth noting that the debtor days ratio can provide an interesting insight into a company's cash flow. Ans. the time allowed for payment). closing B/R 9000 The Debtor days ratio will be high if your customers are quick in paying. The time spent waiting for the money to be collected is the money wasted. Debtor days also known as debtor collection period measures the average number of days it takes to collect payments after sales have been made. of days × Average net receivables / Net credit sales. Let us take another example of ABC Ltd that reported a total annual sales of $2,500,000 for the year ending 31 st December 2016. Hence Reserve for Doubtful Debts should be deducted from closing debtors. If the ratio is running too high, you may need to manage your collection department in a better way. Opening B/R 11000 It will also reflect on the competency of your collection team. Sankaram k Co makes both cash sales and credit sales. (adsbygoogle = window.adsbygoogle || []).push({}); Average Collection Period | Calculator | Example, Reporting to management | Meaning | Objectives or Purpose, FS Analysis & Interpretation | Procedure | Objectives | Importance, General Profitability Ratios | Formula | Significance, Tools or Techniques of Financial Statement Analysis, Standard Costing as management tool | Advantages of Standard Costing, Weaknesses of Trade Union Movement in India and Suggestion to Strengthen, Audit Planning & Developing an Active Audit Plan – Considerations, Advantages, Good and evil effects of Inflation on Economy, Vouching of Cash Receipts | General Guidelines to Auditors, Audit of Clubs, Hotels & Cinemas in India | Guidelines to Auditors, Depreciation – Meaning, Characteristics, Causes, Objectives, Factors Affecting Depreciation Calculation, Inequality of Income – Causes, Evils or Consequences. The average collection period ratio calculates the average amount of time it takes for a company to collect its accounts receivable, or for its clients to pay. The higher ratio can also mean that the company is not selling their products on credit to credit worthy customers. Debtor’s turnover ratio or Accounts receivable turnover ratio … It enables the enterprise to compare the real collection period with the granted/theoretical credit period. Cash Sales – 2,00,000. The DSO has gone up to 52 days due to some delinquent customers. If cash is collected quickly it can be turned it into an investment to generate more revenue. The Average Collection Period Calculator is used to calculate the average collection period. both are not good for your company. = ($30,000 / $210,000) * 365 days. In that case, average collection period will be 55 days. Debtors (Beginning of period) – 50,000 & Debtors (End of period) – 1,00,000. Hence Reserve for Doubtful Debts should be deducted from closing debtors. It is generally determined on a monthly, quarterly and/or annual basis. Average age of debtors is also known as Debtors’ Turnover Ratio. This may lead to cash flow problems. Average Collection Period = Total Accounts Receivable / Credit Sales Per day. It indicates the speed at which the debtors are converted into cash. The Average Collection Period Calculator is used to calculate the average collection period. Due to the cash value in any business, it becomes essential to collect receivable as soon as possible. It is generally determined on a monthly, quarterly and/or annual basis.