Average time to payment by customers, expressed in days, according to the following formula:
((40 + 9150) / (70 + 74 - 740 + 9146)) x 365
This is calculated by dividing the sum of trade receivables and endorsed bills by the gross sales plus VAT. The trade receivables (numerator) include VAT. The denominator must include the seller's VAT as stated in the explanation under heading 9146.
The ratio measures the average time between a sale and its payment. Only normal trade receivables of which the net value is included in the balance sheet are taken into account. This means after deducting the depreciations (for questionable debtors). The figure obtained can be compared to the normal conditions for the industry, and the terms actually on offer.
What can we learn from this figure? Essentially, its aim is to measure the liquidity of short-term trade receivables. However, it must be handled with care. A long average time to payment may be the result of a marketing option or a lack of follow-up of outstanding receivables. It is up to you to consider both alternatives. However, in both cases outstanding receivables must be financed; and every company must weigh the costs. Conversely, excessively brief payment times may indicate overly harsh collection methods which may be harmful to sales efforts.
This ratio is only calculated in complete balance sheets.