馃攳
Average Collection Period | Formula, Examples | Calculation - YouTube
Channel: WallStreetMojo
[12]
hey there folks welcome to wallstreetMojo's Investment Banking tutorial and
[16]
today's topic is average collection period so the average collection period
[21]
is the amount of time which the company typically takes to to receive payment
[26]
from its debtors so for example if I sold a particular for a particular
[33]
period let's just say my sales was XYZ numbers and average receivers for that
[40]
period is again XYZ numbers so if I divide the average receivable by the by the
[47]
overall sales time set by the number of days in a period then I would arrive at
[54]
the average collection period now we will get back to the computation in a
[59]
while but let's just look at the data here and also you know what it entails
[65]
alright so yeah so the formula for the average collection period is like I said
[70]
average accounts receivable per day you know buy at the average credit sales or
[76]
maybe you can just take the credit sales for that particular period so if you're
[81]
working for if you if you want to calculate it for a quarter then it would
[85]
be 90 days but if you want to do it for for the whole year then it's gonna be
[91]
365 days alright so with that being said let's just look at the example here and
[101]
the example which says a company decides to increase its credit term the top
[107]
management of the company requests they accountant to find out the collection
[110]
period of the company in current scenario alright so here's a scenario
[115]
which is given and you can just go ahead and read it and you know understand you
[119]
know how the company can use this information to you know negotiate its
[127]
terms all right yeah so Before we jump into the computation let's look at the
[135]
calculation for the calculation for the average collection
[141]
period here and if you look at the values which are given here to the
[147]
accountant you know it says that the net credit sales for the year was $150,000
[151]
and accounts receivable at the beginning was this much and receivables
[156]
at the end was $30,000 so this gives a this gives an average accounts
[162]
receivable of $25,000 and then this particular value can be plugged in to
[171]
ascertain the accounts receivable turnover ratio so the ratio would be net
[177]
credit sales by the average accounts receivable which was $25,000 which we
[183]
just saw okay so now this gives us a ratio of 6.6 times basically and this
[191]
ratio divided by the overall the number of days divided by this ratio gives us
[196]
the average collection period which is 61 days in this example now lets us
[203]
let's just also look at the users for average collection period so the first
[208]
you use would be to ascertain how much time does the company takes to get its
[215]
money back and you know this is a very vital information in terms of cash flows
[221]
all right so if you know that it takes me 40 days on an average to collect my
[228]
money back you can you know negotiate the terms of
[232]
credit with your suppliers all right obviously they have to agree to that but
[241]
then if they agree you know then you can manage the working capital in such a
[247]
fashion all right then the second second use would be you know it also it also
[255]
helps the company to you know decide if any efficient way of collecting cash can
[262]
be devised you know based upon this particular information all right so now
[269]
let's just look at a live example for a company and then we can wrap this
[275]
up all right so let's go to Edgar and we will look at
[282]
let's look at Walmart all right so Walmart oops
[299]
there's nothing here I think it is just wall not Double L it's just Mod Walmart
[311]
yeah walmart so it's here and we will download the 10k which is the animal
[322]
report and look at the data there all right so now come coming back here you
[330]
have to go to exhibits see I selected financial data so here you see the the
[345]
value for 2018 so this is the year ended Jan 31st 2018
[352]
so this this particular value was for basically the period starting from 1st
[359]
Feb 2017 till 31st Jan 2018 so the total revenues for this particular period has
[367]
been to the tune of $500 billion here so the amount is in millions and
[378]
this is $500 billion and let's just also look at the income
[386]
statement if it is given here yes again the same information is given
[395]
here so we have the information for 16 17 and 18 respectively here and here it
[403]
was for the last 5 years all right so we can come down here and
[411]
take the value for the last 3 years and and that would probably give us a
[423]
sneak peak in the the collection period for this particular company all right so
[432]
let me just open Excel so the values are total revenue so we have the value for
[480]
total revenue for the year 18 17 and 16 now what we want is the
[494]
average value for accounts receivable so accounts receivable at the start of the
[499]
year and at the start at the end of the year so let's just
[504]
go down here yeah so receivables the data for receivers for 18 and 17 is this
[519]
much so it is 5 billion and 5 and 6 5.8 billion and 6
[525]
billion but we don't have the value for 6 16 and 15 so let me also find it
[533]
with this particular word here the receivables
[543]
alright so as we don't have the data we'll have to go back and you know
[549]
download these sheets for the previous years but then let's just you know do
[554]
this for just a single layer so with this particular data we will be able to
[559]
do the average collection period for 2017 right like 2018 you know so
[572]
receivables net so 2017 is this value and 2018 is 6756 all right
[588]
so average value average average receivables
[604]
is going to be the average of these two numbers all right this is average
[615]
receivables and we have the value for total revenues now we just have to do the math
[623]
so average average collection period is going to be
[639]
average receivable by total revenue times 365 that is the number of days in the
[656]
period so the average collection period comes out to be 5 days and you know
[667]
this is a pretty pretty good number so it just means that it takes company just
[673]
5 days to you know recover the money from credit sales and this is a good
[680]
number you know so on similar terms you can do the do the average collection
[685]
period for the past 3 4 years and then you can you know maybe plot them in
[691]
the graph and ascertain the trend so it is you know decreasing then the company
[695]
is doing good and if it is increasing you know then the company is doing
[700]
relatively good all right but then the numbers have to be in this range you
[706]
know so typically a company having an average collection period of 30 days
[711]
is good and in this case if we see that the company is having an average
[718]
collection period of 4 5 days you know this this number would be rounded
[723]
off because you know you cannot have days in points you know so then that
[732]
means it's a good good thing all right so let's just go back to the website and
[741]
try to relook at the formula once again so
[747]
average collection period you know here you know a different computation is
[753]
being used so which is which is given here so which is what we have seen all
[757]
right and you can also do it in this way or
[761]
you can also do it in this way you know the numbers would be just the same so we
[767]
can we can probably do it in this way as well and so the average collection
[773]
period here it says that you know it has 365 days by the accounts receivable
[778]
turnover ratio and accounts receivable turnover ratio is nothing but the sales
[782]
upon the average accounts receivable all right so if we do it in this way it is
[795]
going to be the overall sales by the average receivers so this is going to be
[809]
accounts to see balance accounts receivables turnover ratio and if we
[827]
divide 365 by this value then that should give us the average collection
[834]
period so again with this formula the average collection period is going to be
[842]
365 by this value which is 4.96 so basically there are two ways
[848]
of doing it you know you can use any other ways but the answer is going to be
[852]
the same all right so I hope you've had fun watching this and bye for now
Most Recent Videos:
You can go back to the homepage right here: Homepage