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Excel 2007: Financial Analysis

Calculating the average collection period


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Excel 2007: Financial Analysis

with Curt Frye

Video: Calculating the average collection period

The name of the Average Collection Period ratio is a bit misleading. After all, how can an analyst accurately measure how long on average it takes a company to collect on its debts without having access to data on every transaction? The answer, of course, is that they can't, but you can discover useful information about a company's collection from its public data. The Average Collection Period ratio is calculated in two parts. In the first step, you divide Total Sales by Accounts Receivable, which is the amount yet to be paid for completed sales to calculate the Receivables Turnover ratio.
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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Excel 2007: Financial Analysis
2h 18m Intermediate Aug 25, 2009

Viewers: in countries Watching now:

Numbers and financial data drives today's business world and Excel 2007: Financial Analysis can help decode this information. The proper understanding of these numbers, and the formulas behind them, can be the gateway to corporate and personal success. Microsoft MVP (Most Valuable Professional) Curt Frye teaches basic fluency in corporate finance, enabling users to see the meaning behind essential financial calculations. Curt explains how to review formulas to ensure they have the proper inputs, and shows how to interpret formula output. He also covers how to calculate leverage ratios and amortization and depreciation schedules, as well as forecast future growth. Exercise files accompany this course.

Topics include:
  • Building a financial worksheet with Pivot Tables Reviewing financial statements through common-sized balance sheets Calculating percentage change over time in financial statements Determining profitability ratios and return on investments Studying liquidity and activity ratios through an average collection period Computing the future value of an investment
Subjects:
Business Data Analysis Finance
Software:
Excel
Author:
Curt Frye

Calculating the average collection period

The name of the Average Collection Period ratio is a bit misleading. After all, how can an analyst accurately measure how long on average it takes a company to collect on its debts without having access to data on every transaction? The answer, of course, is that they can't, but you can discover useful information about a company's collection from its public data. The Average Collection Period ratio is calculated in two parts. In the first step, you divide Total Sales by Accounts Receivable, which is the amount yet to be paid for completed sales to calculate the Receivables Turnover ratio.

So on this worksheet, we have Total Sales, Accounts Receivable and Days in Year, which we'll use later. So to calculate the Receivables Turnover ratio, it's equal B5 divided by B6 and there you have that ratio and again, it tells you how many times in a year a company earns the money currently owed by its creditors. You can compare the Receivables Turnover ratio to the Times Interest Earned ratio, which I'll cover elsewhere in this course. That ratio calculates the number of times a year a company earns enough money to cover its interest payments on its debt.

In the second step, you divide 365, the number of days in a year by the result of the first step, the Receivables Turnover ratio. You treat the result as a number of days, which you interpret as the Average Collection Period. So here we have the days in the year, which are in cell B7, and you divide that by the Receivables Turnover ratio, B9. Press Enter and you have an Average Collection Period of just over 80 days. A company's Average Collection Period provides an indirect measure of its health by providing insight into that company's credit granting policies.

If a company's average collection period is higher than that of other companies in the same sector, it could indicate that its customers are running into financial difficulties and therefore pay more slowly. Finally, I would like to point out that analysts differ on how they calculate a company's Average Collection Period. So don't be surprised if you are asked to use a different formula. As long as you use the same formula consistently, your results will be useful.

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