Debtor Collection Period

Submitted To- Submitted By-

Mr. Sameer Kathuria Sakshi Goel
(0191MBA045)
MEANING
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.
SIGNIFICANCE
This period represents the time it takes from when a credit
transaction takes place to when credit payment is made
and received. On average, a lower debtor collection period
is seen as more positive than a high debtor collection
period as it means that a company is collecting payment at
a faster rate. In other words, a reducing period of time is an
indicator of increasing efficiency. It enables the enterprise
to compare the real collection period with the
granted/theoretical credit period. A long debtors collection
period is an indication of slow or late payments by debtors.
How to Calculate?

The debtor collection period ratio is calculated by

dividing the sum owed by a trade debtor to the yearly
sales on credit and multiplying it by 365.

Debtor Collection Period = (Average Debtors / Credit Sales) x 365

 FORMULA
Debtor Collection Period = (Average Debtors / Credit Sales) x 365

Average debtors = Debtors at the beginning of the year + Debtors at the end of the year
2
or

Average Debtor= Debtors + Bills Receivables

Credit Sales are all sales made on credit (i.e. excluding cash sales) 

The multiplier may be changed to 12 (for months) or 52 (for weeks) if appropriate.

EXAMPLE
For example-
If debtors are 25,000 and sales are 200,000, the debtors
collection period ratio will be:

Debtor Collection Period= (25,000 × 365)/200,000

= 46 days approximately.
THANK YOU