Hello ...

I am doing some cash flow analysis for a company and I just looked deeper at what is usually called the "collection ratio".

According to the theory, the collection ratio measures the average
amount of time it takes for a company to collect its sales. The
formula is : receivable/(sales/365). Now lets take for fun a simple
example :

During a week, a company named ABC sold 1$ of merchandise per day to a client named XYZ :

sunday : sold merchandise for 1$ (invoice 001) monday : sold merchandise for 1$ (invoice 002) tuesday : sold merchandise for 1$ (invoice 003) wednesday : sold merchandise for 1$ (invoice 004) thursday : sold merchandise for 1$ (invoice 005) friday : sold merchandise for 1$ (invoice 006) saturday : sold merchandise for 1$ (invoice 007)

On saturday, ABC received payments for invoice 001 and invoice 002.

According to the classical formula applied to a period of one week, the average time ABC takes to collect 123 is

5$/(7$/7) = 5 days

where 5$ is the receivable, 7$ is the revenue for a week and 7 is the amount of days for the targeted period.

Sorry but that does not work.

If we all agree invoice 001 was collected in 6 days and invoice 002 in 5 days the formula should be :

(5 days + 6 days) / 2 = 5.5 days

If we extend our method, the collection ratio should be a sum where each sale is an item weighted by its collection delay and its importance in terms of money.

Any comments?

SES

I am doing some cash flow analysis for a company and I just looked deeper at what is usually called the "collection ratio".

According to the theory, the collection ratio measures the average

During a week, a company named ABC sold 1$ of merchandise per day to a client named XYZ :

sunday : sold merchandise for 1$ (invoice 001) monday : sold merchandise for 1$ (invoice 002) tuesday : sold merchandise for 1$ (invoice 003) wednesday : sold merchandise for 1$ (invoice 004) thursday : sold merchandise for 1$ (invoice 005) friday : sold merchandise for 1$ (invoice 006) saturday : sold merchandise for 1$ (invoice 007)

On saturday, ABC received payments for invoice 001 and invoice 002.

According to the classical formula applied to a period of one week, the average time ABC takes to collect 123 is

5$/(7$/7) = 5 days

where 5$ is the receivable, 7$ is the revenue for a week and 7 is the amount of days for the targeted period.

Sorry but that does not work.

If we all agree invoice 001 was collected in 6 days and invoice 002 in 5 days the formula should be :

(5 days + 6 days) / 2 = 5.5 days

If we extend our method, the collection ratio should be a sum where each sale is an item weighted by its collection delay and its importance in terms of money.

Any comments?

SES