The period, on average, that a business takes to collect the money owed to it by its trade debtors. If a company gives one month’s credit then, on average, it should collect its debts within 45 days. The debtor collection period ratio is calculated by dividing the amount owed by trade debtors by the annual sales on credit and multiplying by 365. For example if debtors are £25,000 and sales are £200,000, the debtors collection period ratio will be: (£25,000 × 365)/£200,000 = 46 days approximately.
(£25,000 × 365)/£200,000 = 46 days approximately.