What is a period of receivables?
The collection of receivables, also known as days in receivables, is the average time that requires the company to collect money from customers with extended credit. This calculation is particularly important because it affects the company's expected cash flow. Businesses use the calculation of this period of collection to determine whether it is necessary to make adjustments according to its credit principles and conditions to ensure that the loan will only be extended to reliable customers and payments are made in time.
The part of the company's accounting process is a loan monitoring that has expanded to customers, known as receivables. The receivable process may be particularly complicated because it includes the company's principles about when to expand their credit and also manage the terms of the loan. For example, the Company could allow customers to extend the loan with a certain minimum credit score and give them 12 months to pay their bills in full. After approval of the credit line, the department of the receivables manages the account,Including an accounting record for each credit customer, collection and recording of payments made, sending a reminder of payments and assessing late fees.
The decision to allow the customer to pay for a long time for the goods or services that they immediately receive can significantly burden the company. Companies that expand the loan must have enough money in the bank to pay for supplies and wait for customers to complete paying for products already in possession. In order to effectively follow cash flows, the company must have adequate expectations when the door comes into the door. It must also have some view of how its customers pay their accounts.
The calculation of the company's receivables period allows managers to evaluate the amount of time the credit account remains open. Helps them to decide to extend the loan that is long enough to attract customers to pThey have seized the purchase so long that the company does not eventually maintain the stock level or pay bills. Many companies monitor the period of collection of receivables and compare it to previous periods as a timely indicator that changes and conditions are needed. If the collection period increases, this may mean that the company should tighten its credit policy or ensure further inventory funding to compensate for a change in cash flows.
The basic way to calculate the average period of collection of the company's receivables is to achieve an outstanding balance of the company's receivables at the beginning of the year and add it to the outstanding balance of receivables at the end of the year. Divide the amount by two and divide the result with a net credit sale of the company. Multiply the result365, the number of days a year. The solution is the average number of days when the credit account remains in receivables per year.