Receivables collection period (Average collection period) is one of the indicators of activity, which indicates how many days it takes our customers to pay our receivables.
If we divide the number of days in the year (365) by the Receivables collection period indicator, we get Receivables turnover ratio.
Receivables are often the average from the beginning and final balance.
Revenues can be adjusted for the sale in cash.
The obtained result may be distorted if
- receivables are not in the usual amount (e.g. are abnormally high)
- revenues do not include VAT, but claims do
- indicator is most often compared with the usual delivery period
- comparison of companies in different industries makes little sense; on the contrary, comparison with competitive entities is very useful
- meaningful is the comparison over time
- advisable is the comparison with Days Payable Outstanding – DPO, which should exceed Receivables collection period
- desirable are low values, which may mean that the company:
- has a good working system of receivables collection
- has customers in good financial condition and/or with a good payment morale
- has a high proportion of sales in cash (however, unless sales in cash were deducted)
- conversed interpretations can be used for higher values; however, these can sometimes be justified by e.g. providing customers with longer maturities as a benefit during acquisition or retention process