The average collection period ratio is defined as shown below: Accounts Receivable / (sales/ 365) It...

The average collection period ratio is defined as shown below:

Accounts Receivable / (sales/ 365)

It shows how many days, on average, it takes to collect your receivables.

If your average collection period was 30 days last year and it is now 45 days, what does that imply? What is happening to your cash position?

What are some things you might do to reduce your average collection period?

Expert Solution

Solution :-

If your average collection period was 30 days last year and it is now 45 days, this imply that now the amount of credit sales from the debtors are now recovered on an average of 45 days . Means now we need to have more cash . As the average collection period gets increased . Our amount now invested more in debtors.

Due to increase in average collection period the amount or level of cash reduced so we want on increase it .

Increase in average collection period leads to having not enough amount of cash.

The things we might do to reduce your average collection period are giving the facility of various discounts to debtors on the early payment basis .If there is any delay in Banking Process to get money then shorten the process. Apart from this enforcing various other policies offers to collect payments etc.

Shortens the Average collection period leads to reduction in the Bad debts and many other benefits too.

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jeff jeffy answered 1 year ago

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