Average Collection Period Ratio | Formulae | Significance

Average Collection Period Ratio is otherwise called as Average Age of Debtors. The term average collection period refers to the number of days waited to receive the amount from the debtors and realized the bills receivables. The following formulae are used to calculate average collection period ratio.

Average Collection Period Ratio or Average Age of Debtors = Average Trade Debtors / Net Credit Sales Per Day

or

Average Collection Period Ratio or Average Age of Debtors = Average Trade Debtors / Annual Net Credit Sales No. of Working days

or

Average Collection Period Ratio or Average Age of Debtors = Average Trade Debtors x No. of Working Days / Annual Net Credit Sales

or

Average Collection Period Ratio or Average Age of Debtors =  No. of Working Days / Debtors Turnover Ratio

Where,

Net Credit Sales per Day = Annual Net Credit Sales / No. of Working Days

If the period is in months,

Average Collection Period Ratio or Average Age of Debtors = Average Trade Debtors x No. of Months / Annual Net Credit Sales

Note: If annual net credit sales is-not available, total sales may be taken into consideration for computation.

Significance of Average Collection Period Ratio

This ratio measures the quality of debtors. If the average collection period is low, the debtors are paying their debts as early as possible. Moreover, the company may take much efforts for the collection of amount from the debtors.

Similarly, the higher the average collection period shows the inefficient management of the company regarding the collection of amount from the debtors, if affects short term liquidity of the company. Moreover, there is a chances for more bad debts. There is no rule of thumb or standard for average collection period ratio.

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