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A firm requires continuously monitoring and controlling its receivables to make sure that the dues are paid on the due date and no dues stay outstanding for a long period of time. The subsequent two methods are used to estimate the management of receivables.
1. Average collection period
2. Aging schedule.
Average collection period (ACP): Average collection period is explained by
ACP = Debtors - 365 × Credit Sales
The average collection period so computed is compared along with the firm's stated credit period to judge the collection efficiency. For illustration, if the firm's stated collection duration is 45 days and the real collection period is 60 days, one may response that the firm's collection efforts are lax. An extended credit period causes liquidity problems and may also conclude in bad debts. Two major disadvantages of this method are as:
(i) This gives an average picture of collection efforts and is depends on aggregate data. This fails to pin point the receivables that are overdue.
(ii) This is susceptible to sales variation and the period over that sales and receivable have been aggregated.
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