Business Analysis with Microsoft® Excel, Second Edition

Analyzing Activity Ratios

There are various ratios that can give you insight into how well a company manages its operating and sales activities. One primary goal—perhaps, the primary goal—of these activities is to produce income through effective use of its resources. Two ways to measure this effectiveness are the average collection period and the inventory turnover rate.

Determining the Average Collection Period

You can obtain a general estimate of the length of time it takes to receive payment for goods or services by calculating the average collection period. One formula for this ratio is

Average Collection Period = Accounts Receivable / (Credit Sales / Days)

where Days is the number of days in the period for which accounts receivable and ...