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How to calculate receivable conversion period?

how to calculate receivable conversion period

Begin with net sales and divide it by the average receivables. Average receivables is calculated by taking receivables at the beginning of the year, plus receivables at the end of the year, then dividing by 2. So net sales divided by average receivables is how many times receivables are collected in a year. Divide that number into 365 days, and that gets you get how long it takes, in days, to convert receivables to cash.

An example is:
Net sales for the year were $9,745,000.
Beginning receivables were 580,000 and ending were 380,000.

So average receivables for the year comes to 580,000 + 380,000/2 = 480,000.

9,745,000/480,000 = 20.3. That is how many times the company collects receivables each year.

365/20.3 = about 18 days is how often receivables are collected, AKA the conversion period.

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