Average Receipts Period Concept
Average Receipts Period is an activity indicator that seeks to measure the efficiency level with which the company is managing its clients credit. The bigger the average receipts term, lower is the credit policy efficiency.
Average receipt period is calculated by the division of the average amount of clients credit by the total sales (added the taxes owed to the company by the clients, namely VAT) at a certain period of time. The indicator can then be converted in days, weeks or months, being enough for that to multiply the result obtained by 365, 52 or 12, accordingly (considering naturally that the considered period was one year).
If a company practices a more strict credit policy, the average receipts term decreases. However, sales have the tendency to decrease since some clients can resort to other suppliers with more flexible credit policies. Therefore, the clients’ credit decisions should take into consideration these two variables.
An alternative to the average receipts term to measure the company’s efficiency in the management of its clients’ credit is the clients’ rotation ratio that measures the number of times that the clients’ credit amount is converted in sales during a certain period of time.