I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

FORMULA TO LEARN 

The estimated average receivables collection period is calculated as: 

*

sales

 

Credit

s

receivable

 

Trade

  365 days 

* The revenue figure from the statement of profit or loss is often used instead of credit sales.  

 

The estimate of the accounts receivable collection period is only approximate. 

(a) 

The value of receivables in the statement of financial position might be abnormally high or low 

compared with the 'normal' level the company usually has. 

(b) 

Revenue in the statement of profit or loss is exclusive of sales taxes, but receivables in the 

statement of financial position are inclusive of sales tax. We are not strictly comparing like with 

like.  

Sales are usually made on 'normal credit terms' of payment within 30 days. A collection period 

significantly in excess of this might be representative of poor management of funds of a business. 

However, some companies must allow generous credit terms to win customers. Exporting companies in 

particular may have to carry large amounts of receivables, and so their average collection period might be 

well in excess of 30 days. 

The trend of the collection period over time is probably the best guide. If the collection period is 

increasing year on year, this is indicative of a poorly managed credit control function (and potentially, 

therefore, a poorly managed company). 

4.9 Receivables collection period: examples 

Using the same types of company as examples, the collection period for each of the companies was as 

follows. 

 

 Trade receivables Collection 

period 

 

Collection period 

Company 

revenue 

(



 365) 

Previous year 

(



 365) 

 

Supermarket 

$284,986K

$5,016K

 

= 

 

6.4 days 

$3,977K

$290,668K

= 

 

5.0 days 

 

Manufacturer 

$2,059.5m

$458.3m = 

 

81.2 days 

$272.4m

$1,274.2m

= 

 

 

78.0 days 

 

Sugar refiner 

and seller 

$3,817.3m

$304.4m = 

 

29.3 days 

$287.0m

$3,366.3m

= 

 

 

31.1 days 

The differences in collection period reflect the differences between the types of business. Supermarkets 

have hardly any trade receivables at all, whereas the manufacturing companies have far more. The 

collection periods are fairly constant from the previous year for all three companies. 

4.10 Inventory turnover period  

Another ratio worth calculating is the inventory turnover period. This is another estimated figure, 

obtainable from published accounts, which indicates the average number of days that items of inventory 

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