Question

What's the difference between days in inventory vs average collection period. They seem to have the same formula or am i missing something?

Answer 1

The average collection period is the average number of days between 1) the date that a credit sale is made, and 2) the date that the money is received from the customer. The average collection period is also referred to as the days' sales in accounts receivable. The formula for the same is:

Average collection Period = 365 / Receivable turnover

The calculation of the days' sales in inventory is: the number of days in a year (365 or 360 days) divided by the inventory turnover ratio. So the formula comes to

Days in Inventory = 365 / Inventory Turnover Ratio.

Thus from we can see that both the formula has different denominators. In one case its Accounts Receivable turnover and on the other hand its the Inventory turnover.