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Business Definition for: collection ratio
Dictionary of Finance and Investment Terms
collection ratio

ratio of a company's accounts receivable to its average daily sales. Average daily sales are obtained by dividing sales for an accounting period by the number of days in the accounting period-annual sales divided by 365, if the accounting period is a year. That result, divided into accounts receivable (an average of beginning and ending accounts receivable is more accurate), is the collection ratio-the average number of days it takes the company to convert receivables into cash. It is also called average collection period.

See also accounts receivable turnover
Dictionary of Business Terms
collection ratio

ratio of a company's accounts receivable to its average daily sales. The collection ratio is the average number of days it takes the company to convert receivables into cash. It is also called average collection period.

See also accounts receivable turnover
Related Terms:
accounts receivable turnover

degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is an opportunity cost of tying up funds in receivables for a longer period of time. The accounts receivable turnover equals:

Annual Credit Sales
Average Accounts Receivable

Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is:

If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.

accounts receivable turnover

degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is an opportunity cost of tying up funds in receivables for a longer period of time. The accounts receivable turnover equals:

Annual Credit Sales
Average Accounts Receivable

Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is:

If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.

Referring Terms:
accounts receivable
accounts receivable turnover
collection period
Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
 Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
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