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.…