Debtor Collection Period
The Debtor Collection Period is a financial metric that measures the average time it takes for a company to collect payments from its customers (debtors) after a sale. It is calculated by dividing accounts receivable by total credit sales and multiplying by the number of days in the period. A shorter debtor collection period indicates that the company is collecting payments quickly, which is beneficial for cash flow.
Example
A company with $100,000 in accounts receivable and $500,000 in credit sales over 90 days has a debtor collection period of 18 days, meaning it takes an average of 18 days to collect payments from customers.
Key points
• The debtor collection period measures the average time it takes for a company to collect payments from customers.
• A shorter period is favorable, as it indicates faster payment collection and better cash flow management.
• It is calculated using accounts receivable and total credit sales.
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