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ACTIVITY RATIOS
DEBTOR'S COLLECTION PERIOD


Introduction

Debtors are organisations or people that owe the business money. This means that debtor’s collection period, is the average amount of days it takes, for the business to receive the money it is owed from its customers. The sooner debtors pay the business the better, so a short debtor’s collection period is good. If debtors pay quickly, it helps cashflow and reduces the risk of customers not paying the money they owe. The calculation for debtor’s collection period is as follows:

Debtor’s Collection Period      =          Debtors (amount of money owed)     x          365
                                                            Sales Turnover

Example Debtor’s Collection Period Calculation

Let’s imagine our fictional business Learnmanagement bookshop LM2 sales turnover is £100000 for the year and they have received most of the money from customers for the books sold. However customers still need to pay LM2 £12000. To calculate the debtor’s collection period for LM2 the following calculation would be used:

 Debtor’s Collection Period     =          12000              x          365      =          43.8 days
                                                            100000

 

The ideal debtor collection period will depend on the type of business. If a business is seasonal this will affect the debtor’s collection period. The other thing to note is that some businesses will deliberately offer customers credit for a set number of days for example 30, 60, 90 days because they feel this will make them more attractive as a business. Any debtor collection period analysis will need to take account of such arrangements.

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