From the course: Running a Profitable Business: Understanding Financial Ratios
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Average collection period
From the course: Running a Profitable Business: Understanding Financial Ratios
Average collection period
- Okay, we've calculated how long our inventory is with us by calculating days sales and inventory. We can do the same thing with receivables. If we sell that inventory on credit, how long until we can expect to get the cash? We may have terms of net 30, but we can calculate how close to that net 30, for example, we are getting by calculating our average collection period. There are two steps in calculating average collection period. Just like with inventory, the first thing we do is calculate our accounts receivable turnover. We take our sales revenue this time. Remember with inventory, we took cost of goods sold. With accounts receivable, we're going to take our sales number, and we're going to divide that by average accounts receivable. And to review, why do we do average accounts receivable? Remember, sales occur throughout the year. We don't want to compare sales through the year with accounts receivable at the end or…
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