Debtor Collection Days Formula

Debtor Collection Days Formula

Debtor Collection days formula has been given below. Debtor collection days formula has been explained with an example.

Debtor Collection Period Formula  =   Debtor or Average Debtor x365                                                                               Credit Sales

 Debtor Collection Days Formula Example

Credit Sales during the year =400,000

Closing Debtor Balance        = 25,000

Calculate Debtor collection period

Solution

Debtor Collection Period =   Debtor or Average Debtor x365  

                                                  Credit Sales

= (25,000/400,000) x 365

=22.81 Days or 23 days

Above example explains that company takes 23 days at average for collection of debt from the customer.

Ideal Debtor Collection Period

Shorter debtor collection period is preferred by almost all companies. However, minimum collection period mainly is determined by the market or industry existing practice and a company can do little about reducing the collection period below market practice.

Significance of Debtor Collection Calculation

Debtor collection days or period is important calculation for the company, because companies are not interest to free financing to customer. Companies are interest to recover the debt as soon as possible.

Early recovery of debt is not only improves the company liquidity position, but also lower the risk of bad debt. Collection department performance is measured on the bases of this ratio and their targets are revised accordingly.

Debtor collection days or period calculation provides useful information for credit policy revision or review. Credit policy may be adjusted accordingly on the bases of debtor collection period information.

Limitations of Debtor Collection Calculation

Credit sales figures are not available in the financial statement. Therefore total sales figure may be used by the companies, which is not a representative figure. Similarly debtor balances used in calculation also have some limitations i.e. a single date or simple average balance not representative of whole year.

Reasons for High Collection period

First of reason for high collection period may be the poor performance of collection department. Other important reason is too maintain goodwill or boost sales by allowing higher collection period.