Debtor collection period
What is a debtor collection period?
A debtor collection period is the amount of time it takes to collect all trade debts. The smaller the amount of time it takes to collect these debts, the more efficient a company will seem to be. A longer period indicates problematic trade debtors or less overall efficiency.
Where have you heard about debtor collection periods?
When offering loans or credit, most companies will have an idea of the expected debtor collection period – how long they will give customers to repay their debts, how many payments it will take and how much each payment should be.
What you need to know about debtor collection periods.
If a business gives two months' free credit then most experts agree that the collection period should be 90 days or less. This period represents the time it takes from when a credit transaction takes place to when credit payment is made and received. On average, a lower debtor collection period is seen as more positive than a high debtor collection period as it means that a company is collecting payment at a faster rate. The debtor collection period ratio is calculated by dividing the sum owed by a trade debtor to the yearly sales on credit and multiplying it by 365.
Find out more about debtor collection periods.
If you are interested in debtor collection periods, look at our page on cash flow.