There is no step by step formula to decrease average collection period because sometime it may be long due to not all payments received from debtors on time. But it is good, if you have succeeded to decrease average collection period because after this, you need less working capital and you can pay your dues from your collected money fastly. Here, I am writing some idea which I am thinking at this time. I hope, it will be useful for you to decrease the average collection period.
Idea No. 1
Average collection period is based on debtor turnover ratio. Debtor turnover ratio is based on total credit sale and average debtor. It means, you have to reach at the point where you have to decrease the amount of credit sale or decrease the amount of average debtor at the time of calculation of ratio. Average debtor is combination of opening debtor and closing debtor. So, manage to collect money from previous year's debtors first.
Idea No. 2
Contact the debtor collectors and collect money from bad debtors.
Idea No. 3
Suppose, you have see your average collection period 60 days. It means, each debtor is paying to you after 2 months on average basis. Slowly, you should make rule that goods can be sold on credit just one month. Sometime, you have to strict to those who pay late and you should have to ban the goods sell on credit. Its result will be on your debt collection movement. Soon, your average collection period will decrease.
Idea No. 4
This idea is just opposite to third idea. You have to create good relationship with your customer. Debtor or customer is also a human being. He uses not only brain but also uses heart. Our heart is always effected from the genuine love of other human being. Good relationship and understanding the problem of your customer of paying late will make good position in the heart of your customer. I think money is not big than human good relation. I think, your average collection period may be decrease very soon, just allow your customer as the family member. Your customer will understand that you also need money and why am I doing delay for paying late? His soul will favour to you and he will surely pay you one day before maturity.
Average collection period is based on debtor turnover ratio. Debtor turnover ratio is based on total credit sale and average debtor. It means, you have to reach at the point where you have to decrease the amount of credit sale or decrease the amount of average debtor at the time of calculation of ratio. Average debtor is combination of opening debtor and closing debtor. So, manage to collect money from previous year's debtors first.
Contact the debtor collectors and collect money from bad debtors.
Suppose, you have see your average collection period 60 days. It means, each debtor is paying to you after 2 months on average basis. Slowly, you should make rule that goods can be sold on credit just one month. Sometime, you have to strict to those who pay late and you should have to ban the goods sell on credit. Its result will be on your debt collection movement. Soon, your average collection period will decrease.
This idea is just opposite to third idea. You have to create good relationship with your customer. Debtor or customer is also a human being. He uses not only brain but also uses heart. Our heart is always effected from the genuine love of other human being. Good relationship and understanding the problem of your customer of paying late will make good position in the heart of your customer. I think money is not big than human good relation. I think, your average collection period may be decrease very soon, just allow your customer as the family member. Your customer will understand that you also need money and why am I doing delay for paying late? His soul will favour to you and he will surely pay you one day before maturity.
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