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 Period12 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.