Importance of Calculating Average Collection period and Average Payment period

Average collection period and and Average payment period is basic test of the business's good or bad activity or operation . This is the main part of financial analysis to calculate these type of ratio . Even a small business man want to time in which he gets his debt from his debtors in whole year . He also wants to know at what period he pays his creditors .


•These two ratios are the good symbol for calculating the efficiency and capacity of any type of organisation

•These two ratios are the good symbol for making good planning for increase or decrease working capital efficiently . Because working capital is more effected from sundry debtors and sundry creditors.
Lets start for calculating these two ratios

1.Average Collection Period
12 months or 365 days
= __________________
Debtors Turnover ratio
Because it is based on debtors turnover ratio . So we should also know debtor turnover ratio
Net Credit Sale
= _______________
Average Debtors amount
Average debtors amount is equal to sum of opening and closing debtors and after divide 2 , we can calculate the average debtors amount.

2. Average Payment Period
12 months or 365 days
= __________________
Creditors Turnover ratio
Because it is based on Creditors turnover ratio . So we should also know Creditors turnover ratio
Net credit Purchase
= _______________
Average Creditors amount
Average Creditors amount is equal to sum of opening and closing Creditors and after divide 2 , we can calculate the average Creditors amount.