Strategic Planning in the Small Business

Unit 2

HO 2-5

(continued)

ceivables. The results

for Waverly Custom Jewelers

in Table

2-10 assume

that all sales are on credit.

Average Collection Period

The average collection period

is

calculated by dividing

365 by the accounts receivable

turnover.

This is very meaningful

because it indicates the average

length

of time the

business must wait to receive

payment on its credit

sales. When added

to average inventory holding

period (365

days divided

by the inventory turnover),

the total conversion

period

is measured in days. Subtracting

the normal time for

payment of credit

purchases giv.s the time span

over which

the business must

wait for cash. If this figure is

beyond industry

expectations,

it may signify that the business

is either too liberal

with

its credit policy or has unusual

difficulty in collections.

Again, if internal comparisons

are done across years and

key

differences were

noted, the owner should

try to understand

whether this

occurs because of the business

policies or changing

Table
2-10
Accounts Receivable Turnover

and Average Collection

Period

Net Credit Sales

Average

Accounts Receivable"

Year 4

Year 3 Year 2

Year 1

493,000 464,000

489,000

421,200

(83,300 + 83,300) (64,000

+

83,300) (486,00 + 64,000) 48,600

5.4 times

6.3 times

8.7 times 8.7 times

End Balance Used for Year 1

365 days

Accounts Receivable Turnover

Year

4 Year 3

Year 2 Year

1

365

365

365 365

5.4 6.3

8.7 8.7

58 days

48 days 42 days

42 days

ChatierTwo

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