Refining Measures to Improve Performance Measurement of the Accounts Receivable Collection Function

Research done by Philip Leitch* and Dawne Lamminmaki**

Abstract

Accounts receivable management is an important facet of financial management. The average collection period and ageing schedule are two widely used gauges of accounts receivable collection performance. These performance measures are deficient, however, especially when used for internal evaluation, as a change in the average collection period or the composition of an aged schedule does not necessarily relate to a change in collection efficiency. This study proposes refinements to these metrics. In the case of the ageing schedule, it is proposed that accounts receivable values should be related to their original credit sales. To calculate the average collection period, it is proposed that the balance of accounts receivable should be divided into age categories and these categories should be matched to the credit sales that generated them. The manner in which these revised measures constitute more accurate internal indicators of accounts receivable performance is outlined and empirically
examined.

*In Vitro Technologies Pty Ltd, Australia
**Griffith University

Keywords:

  • Accounts Receivable Management
  • Credit Management
  • Creditors
  • Average Collection Period
  • Ageing Schedule

 

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Published in The Journal of Applied Management Accounting Research – Summer 2011

About Prof Janek Ratnatunga 1129 Articles
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.
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