QuickBooks 2013 and several different activity ratios can help manage your assets. The average collection period ratio shows how long it takes for a firm to collect on its receivables. You can think about this ratio as a measure of the quality of a firm’s credit and collection procedures.

In other words, this ratio shows how smart a firm is at deciding to whom to extend credit. This ratio also shows how effective a firm is in collecting from customers.

The average collection period ratio formula looks like this:

`average accounts receivable/average credit sales per day`

The balance sheet shown doesn’t show an average accounts receivable balance.

 Assets Cash \$25,000 Inventory 25,000 Current assets \$50,000 Fixed assets (net) 270,000 Total assets \$320,000 Liabilities Accounts payable \$20,000 Loan payable 100,000 Owner’s equity S. Nelson, capital 200,000 Total liabilities and owner’s equity \$320,000

The income statement shown also doesn’t break out sales into credit and cash components.

 Sales revenue \$150,000 Less: Cost of goods sold 30,000 Gross margin \$120,000 Rent 5,000 Wages 50,000 Supplies 5,000 Total operating expenses 60,000 Operating income 60,000 Interest expense (10,000) Net income \$50,000

Suppose that in the business you run, the average accounts receivable is \$60,000. Further suppose that your average credit daily sales equal \$1,000. Using the formula just given, you can calculate the average collection period as follows:

`\$60,000/\$1,000`

This formula returns the value 60. In this case, your business has 60 days of sales in accounts receivable.

The guideline about the average collection period is that it should tie to your payment terms. If your average number of days of credit sales in accounts receivable equals 60, for example, your payment terms should probably be something like net 60 days (which means customers are supposed to pay you in 60 days or less).

Your average collection period, in other words, should show that most of your customers are paying on time. Remember that some of your customers will pay early, and obviously, some of your customers will pay a bit late. You hope that on average, customers pay on time.