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James Millar
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Just ensuring you follow the intent and steps in the calculation. You are trying to determine a ratio for the number of times debtors are collected within a year. Some say this is a method of determining your effectives – I suggest that the related calculation of “debtors days” is a better number to work with.

Anyway I think the step you have identified is only the first of two steps in the calculation. First step is to derive an average debtors figure (you can take a simple average from year opening and year closing or you can take something more accurate like an average from the closing balance for each month for 12 months. The more data the more accurate). Second step is to apply the average from the first step against the total credit based sales for the year. So if your average debtors from step 1 is $300k and your annual credit sales (revenue) was $900k then your collection ratio would be 3 times. Is that number helpful? What can you compare it to? Not much

A better ratio (I think) is to take 365 days and divide by the number 3 determined above. That tells you its taking 121 days to collect your debtors on average. There are more readily available industry averages to compare this against. For example some industries work on 90 days (about the longest). Others work on aiming for 30 days or less. The lower the days the better your cash flow. Simple.

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