What does the formula for the receivables collection period look like?

The receivables collection period is a measure of how long it takes for a company to collect payment from its credit sales. The correct formula for calculating the receivables collection period is derived by using the ratio of trade receivables to revenue.

When trade receivables are divided by revenue, you obtain the average number of days it takes to collect on sales made on credit. This result is then annualized by multiplying by 365, which translates the average collection period into a yearly figure. This calculation provides valuable insight into the effectiveness of a company’s credit policies and its cash flow management, allowing stakeholders to assess how quickly the company can convert its sales into cash.

The other options do not accurately represent the receivables collection period. Using expenses instead of revenue (as in the first option) does not provide relevant insights into cash collection related to sales. Similarly, the third option, which suggests dividing revenue by trade receivables, reverses the relationship and does not yield a period of collection. Finally, the fourth option incorrectly uses current assets in the calculation, which is irrelevant to the specific assessment of trade receivables and their collection efficiency.