42 3.2.4 Debtors Turnover Ratio (Debtors' Velocity) These days some amount of sales always locked up in the form of book debts. Efficient credit control and prompt collection of amounts due will mean lower investments in book debts. This ratio measures the net credit sales of a firm to the recorded trade debtors thereby indicating the rate at which cash is generated by turnover of receivable or debtors. This ratio is calculated as: Net Sales Debtors Turnover Ratio Average Debtors Average debtors refer to the average of opening and closing balance of debtors for the period. Debtors include bills receivables but exclude debts which arise on account of transactions other than sale of goods. While calculating debtors turnover, it is important to note that provision for bad and doubtful debts are not deducted from total debtors in order to avoid the impression that a larger amount of receivables have been collected Debt Collection Period: This ratio indicates the extent to which the debts have been collected in time. This ratio is infact, interrelated with and dependent upon the debtors turnover ratio. It is calculated by dividing the days in a year by the debtors turnover. This ratio can be computed as follows: 0 Months / Days in a Year Debtors Tumover OR Average Debtors x Nonths / Days in a Year Net Credit Sales for the Year OR Average Debtors Average Monthly/Daily Credit Sales Debtors' collection period shows the quality of debtors since it measures the speed with which money is collected from them. It is rather difficult to specify a standard collection period for debtors. It depends upon the nature of the industry, seasonal character of the business and credit policy of the firm etc. Illustration 3 From the following information, calculate. debtors turnover ratio and average collection period. Total debtors (opening balance) 2,00.000 Cash sales 1,50,000 Credit sales 10,00,000 Cash collected 7,80.000 Sales returns 60,000 Bad debts 40,000 Discount allowed 20,000 Provision for bad debts 25,000 No. of days in a year - 360