Debtor collection period is the time it takes for customers to receive invoices, schedule payment, and present payment to the supplier. Companies monitor the period to identify increases and reduce it to an advantageous average. The formula involves identifying the average number of debtors and the duration of the period. A shorter collection period indicates healthy turnover and cash flow, while a longer period may cause potential cash flow problems.
A debtor collection period is the amount of time it takes for a business’s customers to receive invoices for goods and services provided, schedule payment for those invoices, and ultimately present that payment to the supplier. Typically, the collection period begins on the date the invoice is issued and ends on the date payment for that invoice is posted. Companies will monitor both the debtor’s collection period for each individual customer, as well as periodically take a snapshot of the average period for the entire customer base. By doing so, it is possible to identify when the period is experiencing some type of increase, and allows the company to take the appropriate steps to reduce the period to an average that is most advantageous.
The basic formula for calculating any type of debtor collection period for a customer base as a whole begins by identifying the average number of debtors relevant for the time period considered. This is done by identifying the number of active debtors on the first day of the period, as well as the active debtors on the last day of the period. Those two figures are added together and then divided by two to provide the necessary average.
Once the average number of debtors for the period is established, the duration of the period considered is identified. Depending on the reason for the calculation, the duration can be a full calendar year, a quarter, or even a week. Multiplying the average number of debtors by the duration, expressed in the number of days involved in the period, will provide the final result. In some cases, it may be appropriate to calculate the debtor’s collection period using 12 months instead of 365 days, depending on how the resulting data will be used to analyze invoice due dates in accounts receivable. That figure is divided by the total number of sales generated during the period considered to identify the debtor’s average collection period for that particular time period.
Ideally, the goal is to achieve a debtor collection period that is shorter than long. For example, if the calculation indicates that the debtor’s average collection period is 60 days or less, this is an indication of a healthy turnover in accounts receivable that is likely to provide a fair amount of cash flow. On the other hand, if the average collection period is longer than 90 days, company owners and managers will want to take a close look at current policies and procedures, as well as identify specific customers who may be significantly contributing to longer durations, causing Potential cash flow problems.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
