debtor collection period (2024)

FAQs

What is an acceptable debtors collection period? ›

The period, on average, that a business takes to collect the money owed to it by its trade debtors. If a company gives one month's credit then, on average, it should collect its debts within 45 days.

The average collection period is calculated by dividing a company's yearly accounts receivable balance by its yearly total net sales; this number is then multiplied by 365 to generate a number in days.

Most businesses require invoices to be paid in about 30 days, so Company A's average of 38 days means accounts are often overdue. A lower average, say around 26 days, would indicate collection is efficient and effective.

A shorter average collection period (60 days or less) is generally preferable and means a business has higher liquidity. Average collection period is also used to calculate another liquidity measure, the receivables turnover ratio.

A debtor collection period is the amount of time it takes to collect all trade debts. The smaller the amount of time it takes to collect these debts, the more efficient a company will seem to be. A longer period indicates problematic trade debtors or less overall efficiency.

Companies typically favour a lower average collection period because it means there's a shorter time between converting your average balance from accounts receivable to cash. It means a company is able to receive payment from customers much sooner.

High collection period: A high collection period indicates companies are collecting payments at a slower rate. This isn't necessarily reflective of the company's actions, however. A high collection period could mean customers are taking their time to pay their bills.

A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts.

The average collection period represents the average number of days between a credit sale date and the date the purchaser remits payment.

To calculate accounts receivable days, divide the accounts receivable by the total credit sales and then multiply the result by the number of days in the period you want to calculate (usually a year). This formula helps measure how long it takes for a company to collect payments from its customers.

What is the average debtor days? ›

In simplest terms, debtor days measure how quickly a business gets paid. Average debtor days, also known as “day's sales in accounts receivable,” are determined by dividing the average number of daily sales by the average number of debtor days.

Collection period indicates the period taken for recovery of the receivables. Therefore, if it decreases that shall indicate that the collection is being made more efficiently.

This rule states that a creditor must not contact the person who owes them money more than seven times within a 7-day period. Also, they must not contact the individual within seven days after engaging in a phone conversation about a particular debt.

In most cases, a lower average collection period is generally better for business as it indicates faster cash turnover, which improves liquidity and reduces credit risk.

As a general rule, companies prefer a shorter average collection period, as it indicates that the organization efficiently collects its receivables. Typically, 60 days or less is considered a low Average Collection Period and indicates that a company has higher liquidity.

An average collection period of 30 days indicates that the company typically collects its accounts receivable within a 30-day timeframe.