Ten Turns a Year Means Your Customers Pay in 37 Days

The average hides the tail that hurts

An average of 36.5 days is compatible with almost every invoice being settled in a fortnight and a handful sitting unpaid for six months. Those two situations demand entirely different responses, and the ratio cannot tell them apart. The instrument that can is an ageing schedule: the same balance split into buckets by how long each invoice has been outstanding. A business whose average is respectable but whose 90-day bucket keeps growing is heading for a write-off, and the ratio will report the deterioration only once the bad debt is large enough to move the mean — by which point it is a recovery problem rather than a collections one.

Why 365 and not the working year

Because customers pay on calendar days, not working days, and the money is absent from the account at weekends just as it is on Tuesdays. Using 250 working days instead would report 25 days rather than 36.5 for the same situation and would flatter every business that used it — which is precisely why the convention is fixed at 365. The one place the distinction bites is comparing terms: a supplier offering thirty days means thirty calendar days, so a business collecting in 36.5 is running about a week behind its own stated terms, not five days ahead of them.

Frequently asked questions

Should cash sales be included in the numerator?

No, and including them is the most common way to make this ratio meaningless. Cash sales never create a receivable, so putting them in the numerator inflates the turnover and shortens the apparent collection period without anything having improved. A retailer taking 80 % of its revenue at the till and 20 % on account would report a turnover five times too high. The fix is to use credit sales only; if the accounting system cannot separate them, the ratio is still useful for tracking change over time within one business, but it should not be compared with anyone else's.

Is a very high turnover always good?

Not necessarily, because it can mean credit terms so tight that customers go elsewhere. A turnover of 24 — payment in a fortnight — is excellent for cash flow and may be costing sales to competitors offering sixty days. The right level is a commercial decision rather than a financial one, and the useful comparison is against the terms actually offered rather than against a benchmark. What is unambiguously worth investigating is a turnover that moves sharply in either direction without a change of policy, since that means customer behaviour has changed and nobody has decided anything.