The formula for finding the average collection period

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Unformatted text preview: ents: (1) the time from sale until the customer places the payment in the mail and (2) the time to receive, process, and collect the payment once it has been mailed by the customer. The formula for finding the average collection period is Average collection period Accounts receivable Average sales per day (14.10) Assuming receipt, processing, and collection time is constant, the average collection period tells the firm, on average, when its customers pay their accounts. Knowing its average collection period enables the firm to determine whether there is a general problem with accounts receivable. For example, a firm that has credit terms of net 30 would expect its average collection period (minus receipt, processing, and collection time) to equal about 30 days. If the actual collection period is significantly greater than 30 days, the firm has reason to review its credit operations. If the firm’s average collection period is increasing over time, it has cause for concern about its accounts receivable management. A first step in analyzing an accounts receivable problem is t...
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This document was uploaded on 01/19/2014.

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