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

Abstract

Accounts receivable management is an important facet of financial management. The average collection period and aging 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