Annual turnover including GST $10 million
Trade debtors $1.5 million
Number of days' credit 55
The calculation is: (1.5 / 10) x 365 = 55 days
Obviously, the lower the number of days the more efficiently the business is being run.
The figure for trade debtors normally comes from the closing Balance Sheet and care should be taken that it is a figure typical of the whole year.
If $1.5 million of the $10 million turnover came in the final month, the number of days' credit is really 31 instead of 55.
The calculation is: (1.5 / 1.5 ) x 31 = 31 days
Care should also be taken that the GST-inclusive debtors figure is compared with the GST-inclusive turnover figure.
GST is normally excluded from the Profit and Loss Account.
GST = General Sales Tax
In other countries, it is the VAT or Value Added Tax.