The collection ratio is the average period of time that an organization’s trade accounts receivable are outstanding. The formula for the collection ratio is to divide total receivables by average daily sales. A lengthy period during which receivables are outstanding represents an increased credit risk for the seller, and also requires a larger working capital investment to fund the underlying inventory that was sold. However, a business may deliberately allow a long collection period in order to service higher credit-risk customers to which its competitors are unwilling to sell.
The collection ratio is also known as the average collection period.