# 5.4.3 Receivables collection period

The receivables collection period calculates the average number of days a business takes to recover its credit sales and is only relevant if the business sells on credit. Although this ratio should ideally compare average accounts receivables with credit sales, these figures are often not available in the published financial statements. Therefore, it can be calculated using:

1. Either an average of opening and closing accounts receivables or simply by using closing accounts receivables.
2. Sales figures from the financial statements instead of credit sales.

In this course, the following formula will be used to calculate the receivables collection period:

Below is the calculation of the receivables collection period for Remote Sensors Plc.

##

| 2025 | 2024 | 2023
--- | --- | --- | ---
Accounts receivables | 1,982 | 1,750 | 2,280
Sales revenue | 17,860 | 16,995 | 15,990
Receivables collection period | 41 | 38 | 52

The most useful way to interpret this ratio is by comparing the receivables collection period with the credit period a business normally allows to its customers. For example, a collection period of 38 days may seem very good initially until we discover that the business allows only 20 days to its customers for payment. Thus a higher collection period indicates problems with debt collection and stricter bill collection measures need to be pursued. In the case of Remote Sensors Plc, you can see a decrease in the receivables collection period from 2023 to 2024. It slightly increased in 2025 to 41 days. Generally, a lower receivables collection period ratio is considered good for business as it means that only a small proportion of a company’s funds are locked up in accounts receivables. This also reduces the risk of default in a company’s accounts receivables. However, management might also consider that by having a very tight credit policy or allowing a very few days to accounts receivables for payment, the company may lose some good customers.

Activity 16 provides you with an opportunity to practise calculating as well as interpreting the receivables collection period of a real company.

## Activity 16 Calculating Receivables collection period

Allow 10 minutes

Read the data on receivables and revenue for Marks & Spencer Group Plc from 2018 to 2022 (obtained from Fame) and answer the following questions.

1. Calculate the receivables collection period for the years 2018 to 2022.

##

| 2022 | 2021 | 2020 | 2019 | 2018
--- | --- | --- | --- | --- | ---
| £m | £m | £m | £m | £m
Accounts receivables | 98.2 | 106.1 | 146.8 | 118.6 | 113.9
Revenue | 10,885.1 | 9,155.7 | 10,181.9 | 10,377.3 | 10,698.2
Receivables collection period | (A text entry box would appear here, but your browser does not support it.) | (A text entry box would appear here, but your browser does not support it.) | (A text entry box would appear here, but your browser does not support it.) | (A text entry box would appear here, but your browser does not support it.) | (A text entry box would appear here, but your browser does not support it.)

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### Feedback

##

| 2022 | 2021 | 2020 | 2019 | 2018
--- | --- | --- | --- | --- | ---
| £m | £m | £m | £m | £m
Accounts receivables | 98.2 | 106.1 | 146.8 | 118.6 | 113.9
Revenue | 10,885.1 | 9,155.7 | 10,181.9 | 10,377.3 | 10,698.2
Receivables collection period | 3 | 4 | 5 | 4 | 4

2. Can you envisage any problems with what this ratio indicates about the receivables collection period at M&S?

(A text entry box would appear here, but your browser does not support it.)

### Feedback

You may observe that the receivables collection period for M&S has consistently been only a few days from 2018 to 2022 and that may give the impression that since the company is a retail business, it is performing excellently in terms of debt collection. However, a closer analysis may reveal that most customers pay M&S at the point of purchase. Therefore, the revenue figure extracted from its annual report is mostly cash sales: credit sales will be a very small chunk of this total revenue figure. Therefore, comparing the company’s accounts receivables with total revenue can be rather misleading in this type of business organisation where revenue is mainly generated by cash sales. This is the reason why it is important to be aware of the nature of the business being analysed and the composition of formulas used for calculating ratios, and to use the same formulas consistently when drawing comparisons.

OpenLearn - Financial statement analysis and interpretation
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