Collection Ratio + Accounts Receivable + (Revenue/365)
This indicates the average number of days it takes a company to collect on invoices.
Things to remember
- A high ratio indicates that the company is having problems getting paid for services or products.
- The ratio is sometimes seasonally affected, rising during busy seasons and falling during the off-season. To account for this seasonality, the average accounts receivable ((beginning + ending accounts receivable)/2) could be used instead.
For Cory's Tequila Co.: $1,242 ÷ ($12,154/365) = 37.3
Collection Ratio Analysis:
This ratio could perhaps be renamed as the "Thug Ratio", it explains the average time it takes to receive payment on sales. The "Thugs" at Cory's Tequila Co. seem to be doing their job quite well, on average it takes 37 days for customers to clear their invoices. This is quite reasonable since most companies pay all of their bills on a monthly basis. If we were really picky we could redo this calculation using only credit sales since cash purchases are received immediately.