Hi guys, can someone please help me distinguish between weighted average collection period and average days of receivables; if one increases and ither decreases - what soes it indicate about cash receipt from creditors?
thanks for your help
Hi Bridgegap,
The average collection period is the same as average days of receivables. which means that the average number of days it takes debtors to pay up.
It is calculated in 2 ways:
Option I : Using Receivable Turnover: Sales/Average Receivables. To get Average Collection/Oustanding Days, you divide 365 days by receivable turnover.
Option II: Solving the formula (Average Collection Period) = 365/Receivable Turnover as 365/Sales/Average Receivables which in turn will give you 365*Average Receivables/Sales.
The indication depends on what you are comparing the figure with. However, a lower Average Collection period means debtors pay up early which is favourable.
Hope this helps.
Best Regards.
Hey Bridgegap,
Both are same and it shows that how much time company is taking to receive their payments or receivables or short term debtors. If it increases that means company is facing illiquidity problems and effeciently managing their accounts receivables. And if it is decreasing it means company is managing their accounts recievables efficiently or they are too agressive
Average Days of Receivables means how many receivables you have. Weighted Average Collection Period means how long your receivables have been outstanding.
These two things are not related as the amount of receivables you have and the length of time they have been outstanding are two different things.
For example: In 2012 you have a smaller amount of receivables than what was in 2011. But the receivables in 2012 have been outstanding for longer than what you had in 2011. So, in case if you have same revenues in these 2 years, Average day receivables will decrease while Collection period will increase
Thanks all. It was quite helpful.
Can you explicate this a little further?
The “days of receivables” has its “unit” as no of days; so, is the case for “how long have the receivables been outstanding”?
Why do you explicitly mention “same revenues”? What’s the catch?