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What Is Receivables Collection?

what is receivables collection

Definition of the Receivable Collection Period

  • The receivable collection period is a period when a firm receives the amount owed by their customers (Account receivable).
  • Firms need to know this because they have to make sure they have enough in hand for their current obligations.
  • Because of the time value of money, firms aim to keep this period as short as possible without losing other benefits.
  • Depending on the business management style, there is no specific number of days that are the best. However, most firms collect them within thirty days.
  • If it takes a firm longer than they expect, they should implement a more efficient method of collection.

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What is the Formula for the Receivable Collection Period?

  • The average collection period can be calculated with two formulas.
  • The first one is to multiply days in period with average account receivables and divide them average credit sales per day.

Receivable collection period = (Days in period x Average account receivables) / Average credit sales per day 

  • The second way to calculate it is to divide the number of days in period by account receivable turnover ratio.

Receivable collection period = Days in period / Account receivable turnover ratio

  • The account receivable turnover ratio is calculated by dividing net credit sales by average accounts receivable.

Accounts receivable turnover = Net credit sales / Average accounts receivable 

Receivable Collection Period in Practice

  • Assume that Nancy’s flowers have an average account receivable of $60,000 for the year and average credit sales per day on $900,000.
  • The average collection period would be (365 x $60,000)/ $900,000 = 24.33 OR
  • Accounts receivable turnover = $900,000/$60,000 = 15, Receivable collection period = 365/15 = 24.33
  • In conclusion, Nancy’s flowers take around 24 to 25 days to collect their accounts receivable.

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