The average number of days that the debtors take to pay off their accounts is termed as debtor's velocity. The debtor's velocity for the given question will be 36.95 days.
What is debtor's velocity?
The term debtor's velocity can be defined as the number of times the debtors can be converted into cash. Simply, it is the time taken by average debtors to pay off their debts in respect of the credit sales. The formula to calculate the debtors' velocity is:
[tex]\rm Debtor's\: velocity = \dfrac{365\:days}{Debtor's \:turnover\:ratio}\\\\\rm Debtor's\: velocity = 365 \times \dfrac{ Average \:receivables}{Credit\:sales}[/tex]
Since the debtor's turnover ratio is the fraction of Credit sales to average account receivables.
Given:
Accounts receivables balance is $246,000
Credit sales is $2,430,000
Therefore the debtors' velocity will be:
[tex]\rm Debtor's\: velocity = 365 \times \dfrac{ Average \:receivables}{Credit\:sales}\\\\\rm Debtor's\: velocity = 365 \times \dfrac{\$246,000}{\$2,430,000}\\\\\rm Debtor's\: velocity = 365 \times 0.1012\\\\\rm Debtor's\: velocity = 36.95[/tex]
Therefore the number of days the credit customers will take to pay off their accounts is 36.95 days.
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