 Skip to content

# VMC: What Is Receivables Collection?

The post was originally published here.

## Definition of the Receivable Collection Period

• The receivable collection period is a period when a firm receives the amount owed by their customers (Account receivable).
• Firms need to know this because they have to make sure they have enough in hand for their current obligations.
• Because of the time value of money, firms aim to keep this period as short as possible without losing other benefits.
• Depending on the business management style, there is no specific number of days that are the best. However, most firms collect them within thirty days.
• If it takes a firm longer than they expect, they should implement a more efficient method of collection.

## What is the Formula for the Receivable Collection Period?

• The average collection period can be calculated with two formulas.
• The first one is to multiply days in period with average account receivables and divide them average credit sales per day.

Receivable collection period = (Days in period x Average account receivables) / Average credit sales per day

• The second way to calculate it is to divide the number of days in period by account receivable turnover ratio.

Receivable collection period = Days in period / Account receivable turnover ratio

• The account receivable turnover ratio is calculated by dividing net credit sales by average accounts receivable.

Accounts receivable turnover = Net credit sales / Average accounts receivable

## Receivable Collection Period in Practice

• Assume that Nancy’s flowers have an average account receivable of \$60,000 for the year and average credit sales per day of \$900,000.
• The average collection period would be (365 x \$60,000)/ \$900,000 = 24.33 OR
• Accounts receivable turnover = \$900,000/\$60,000 = 15, Receivable collection period = 365/15 = 24.33
• In conclusion, Nancy’s flowers take around 24 to 25 days to collect their accounts receivable.

### Join the Bootcamp for Valuation!

The Valuation Master Class is the complete, proven, step-by-step course to guide you from novice to valuation expert.

Save with coupon code: get-smarter