Debtor's Collection Period

• Business Management Articles
• Activity Ratios
• Debtor's Collection Period

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.

How Do You Calculate The Debtor's Collection Period?

The following calculation is used to calculate The Debtor's Collection Period:

Debtors's Collection Period  =  Debtors (amount of money owed)  x  365  =  Number of days taken to collect debt

               ______________________

               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:

Debtors's Collection Period  =  1200    x  365  =  43.8

               ________

               100,000

In our example it takes the business 43.8 days to collect the money it is owed by its debtors.

What Is The Ideal Debtor Collection Period

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.

Conclusion

We hope you enjoyed learning about the debtor collection period. Carry on your activity ratio learning by visiting the following pages:

Inventory Turnover Ratio | Asset Turnover Ratio