Q. What is Evaluation of Credit Policy?
Evaluation of Credit Policy: - A credit policy is prepared to maintain the investment in receivables at optimum level. Receivable Turnover Ratio can be use:-
Receivable Turnover Ratio = Net Credit Sales / (Average Debtors + Average Bills Receivables)
If this ratio comes to 6, it means that the collection from receivables is being made after 12/6= 2 months. Similarly, if the ratio comes to 3, it means that the collection is being made after 12/3 = 4 months.
Average Collection Period = Months or days in a period / Receivables Turnover Ratio