Definition: The Average Collection Period, also called as Debt Collection Period, shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales?
This period encompasses the duration when the credit was given to the customer or client and the date when the cash was realized against it. The formula to compute this ratio is:
Average Collection period = Days in a year / Debtors Turnover Ratio
The efficiency of the collection period can be assessed by comparing the average against the credit period allowed to the customers.
Note: Generally, 365 days are considered
Example: Suppose a firm has a credit sales of Rs 5,00,000 and the average account receivables is Rs 1,00,000, then
Average Collection Period = 365/5 = 73 days
Debtors Turnover Ratio = 5,00,000/1,00,000 = 5