From the course: Corporate Financial Statement Analysis
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Average collection period
From the course: Corporate Financial Statement Analysis
Average collection period
- We need to keep an eye on how efficiently we are managing our inventory and how efficiently we are managing our receivables. These two ratios, days' sales in inventory and average collection period, help us keep an eye on these two very important assets. Okay, we've calculated how long our inventory is with us by calculating days' sales in inventory. We can do the same thing with receivables. If we sell that inventory on credit, how long until we can expect to get the cash? Now, we may have credit terms of net 30, but we can calculate how close to that net 30, for example, we are by calculating our average collection period. Now, there are two steps in calculating average collection period, just like there was with inventory. The first thing we do is calculate our accounts receivable turnover. With accounts receivable, we're going to take our sales number and we're going to divide that by average accounts receivable. And to review, why do we do average accounts receivable? Remember,…
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