Is a Decrease in the Average Debtors Period Good?

Above query was sent by the student of Midrand, Gauteng, South Africa. He want to ask me the answer of above question. Actually, he wants to get further clarification regarding my previous answer of above question.

In general we can say yes, a decrease in the average debtors period is good. When we calculate average debtor period or average collection period  in ratio analysis, we can see our present period in which we receive money from our debtor. If in future, it will decrease from current period of collection from debtor, it means we have increase our capability of collection the debt from debtors. But decreasing in average debtor period will compel you to think flip side of this accounting event. I am trying you to make understand flip side of above question.

1. No, it is not good because when we get all cash immediately, it may possible that we will misuse it because we are getting cash fastly but if we are paying our expenses according to previous average collection period, then it may possible that at the time of payment, we have no money. So, medium collection period is also create reserve for paying our future expenses.

2. We can not say, this is only single good indicator for business's solvency position but we have to see and analyze other factors of debtor management.