Calculate the time it takes you to collect payment following a credit sale.
This ratio determines how long your company's money is tied up in customer credit. It facilitates analysis of the collection of accounts receivable, which may not always be the same as the credit terms which you have issued to customers. By considering your credit terms you can assess the 'quality' of these receivables.
The Debtor Collection Period is a 'performance ratio', which means that it indicates the efficiency of a business. Efficiency and performance are linked, as efficient businesses are usually more profitable. Each industry has an average collection period, but generally 10 to 15 days over the extended credit term should cause concern.
This ratio gives you one insight into your business. To determine the full financial performance of your business, you will also need to analyse your financial statements and calculate the other financial ratios.