What it is:
This ratio will indicate how quickly your customers are paying their bills by revealing the average length of your collection period. Ideally, the average collections period will be less than your credit terms plus 15 days.
When to use it:
The speed at which bills are collected has a significant impact on a business' cash flow. Use this ratio to determine how long your company's money is being tied up in customer credit. If you allow different credit terms for different transactions - net plus 30 days for some customers, net plus 60 for others -calculate the average collection periods separately.
The formula:
Accounts receivable divided by (annual net credit sales divided by 365)
Calculate your average collections period:
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