Average Collection Period Ratio:
Debtors/Receivable Turnover ratio when calculated
in terms of days is known as Average Collection Period or Debtors
Collection Period Ratio.
The average collection period ratio represents
the average number of days for which a firm has to wait before its debtors are
converted into cash.
Formula of Average Collection Period:
Following formula is used to calculate average
(Trade Debtors × No. of Working Days) / Net Credit Sales
Credit sales $25,000; Return inwards $1,000; Debtors $3,000; Bills
Calculate average collection
Average collection period can be calculated as
Average Collection Period = (Trade
Debtors × No. of Working Days) / Net Credit Sales
4,000* × 360** / 24,000
= 60 Days
Debtors and bills receivables are added.
calculating this ratio usually the number of working days in a year are
assumed to be 360.
Significance of the Ratio:
This ratio measures the quality of debtors. A short collection period implies
prompt payment by debtors. It reduces the chances of bad debts. Similarly, a
longer collection period implies too liberal and inefficient credit collection
performance. It is difficult to provide a standard collection period of debtors.