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Average Collection Ratio Calculator

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The Average Collection Ratio Calculator is an essential financial tool for businesses to measure the effectiveness of their accounts receivable management over multiple periods. This calculator helps businesses understand how well they are managing the credit extended to customers by comparing total credit sales to the amounts actually collected.

Formula of Average Collection Ratio Calculator

Average Collection Ratio Calculation

To compute the average collection ratio, use this formula:

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Average Collection Ratio = (Sum of Individual Collection Ratios) / (Number of Periods)

Where:

• Sum of Individual Collection Ratios = R1 + R2 + R3 + … + Rn
• Number of Periods = n

This formula provides a comprehensive measure by averaging the collection ratios over several periods, offering insights into trends and the effectiveness of credit and collection policies.

Specific Collection Ratio Calculation

For assessing a specific period, use the following formula:

Collection Ratio = Total Credit Sales / Average Accounts Receivable

Where:

• Total Credit Sales: The revenue generated from sales made on credit during the period.
• Average Accounts Receivable: Calculated as (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

This calculation allows businesses to evaluate how efficiently they are collecting on credit sales in a given period, which is crucial for maintaining cash flow and financial stability.

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Example of Average Collection Ratio Calculator

Consider a company that has the following quarterly credit sales and average accounts receivable:

• Q1 Credit Sales: \$100,000, Average Accounts Receivable: \$50,000
• Q2 Credit Sales: \$150,000, Average Accounts Receivable: \$75,000
• Q3 Credit Sales: \$120,000, Average Accounts Receivable: \$60,000
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Using the formula for each quarter:

• Q1 Collection Ratio = \$100,000 / \$50,000 = 2
• Q2 Collection Ratio = \$150,000 / \$75,000 = 2
• Q3 Collection Ratio = \$120,000 / \$60,000 = 2

Average Collection Ratio = (2 + 2 + 2) / 3 = 2

This calculation shows that on average, the company collects twice the amount of its average receivables each quarter.

Most Common FAQs

What is an Average Collection Ratio?

It is a metric used to evaluate the average effectiveness of a company’s credit and collections efforts over multiple periods.

Why is monitoring the Average Collection Ratio important for a business?

Regular assessment of this ratio helps businesses manage their receivables more efficiently, ensuring optimal cash flow and reducing the risk of bad debts.

How can a business improve its Collection Ratio?

Improving this ratio can be achieved by tightening credit policies, enhancing collection efforts, and possibly offering early payment incentives to customers.