Collection time

Also referred as collection period and days’ sales in receivables period. It is the average time needs to collect money from an account receivable or a debtor.


Formula of Collection time


                                                   365 days
   Collection time    =            ----------------------------
                                          Receivables Turnover


EXAMPLE
                                                  Sales
Receivables Turnover =     ---------------------------------------
                                          Accounts Receivables
For XYZ company:
                                        $800
Receivables Turnove =       ----------  =  4 times
                                        $200

Therefore XYZ company collected its outstanding credit accounts and reloaded the money 4 times during the year.
(Assuming all the sales are credit sales. If not, we use only credit sales for this ratio)

                                                  365 days
   Collection time    =            ----------------------------
                                          Receivables Turnover



                                                 365 days
   Collection time    =            -----------------------   = 91
                                                      4

Means that the company's collection time is 91 days implies that it takes on average 91 days to collect money from customers or debtors