Definition:
Average Days to Collect Receivables is a financial ratio that measures the average number of days it takes a company to collect payments from its customers. It’s a key indicator of a company’s credit management efficiency and its ability to generate cash flow.
Formula:
Average Days to Collect Receivables = (Average Accounts Receivable / Net Credit Sales) * 365
Why is Average Days to Collect Receivables important?
- Cash Flow: A shorter average days to collect receivables means a company is collecting payments faster, improving its cash flow.
- Credit Risk: A longer average days to collect receivables may indicate a higher risk of bad debts.
- Efficiency: A shorter average days to collect receivables suggests efficient credit management practices.
A lower average days to collect receivables is generally desirable, as it indicates that the company is collecting payments promptly from its customers. However, it’s important to consider other factors, such as industry standards and the company’s credit policies, when interpreting this ratio.
