Collection Ratio

The number of days taken by a firm for converting its receivable accounts into cash is termed as collection ratio. The period termed as collection ratio must either decrease or remain constant and are reviewed either yearly or quarterly. If the ratio indicates a low figure, it suggests that the company collects its receivable accounts quickly. There important figures are required for the calculation of collection ratio – the total of receivable accounts, total credit sales for the analyzed period and the total number of days within the period.

The formula is (Accounts receivable/total credit sales for the period) x Number of days in the period.

Today, most businesses permit customers to make use of their credit cards if the size of transaction is large. But, one of the major problems with credit cards is that the business does not know when the customer will be able to make payments. A lower collection ratio means that the company will not take a long time to convert its receivables into cash.

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Edited and Updated 31st May 2014

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