Which metric is used to evaluate credit and collection policies within a firm?

The average collection period metric is used to evaluate credit and collection policies within a firm because it measures the average number of days that accounts receivable remain outstanding before they are collected. This metric provides insights into how effectively a company is managing its credit policies and the efficiency of its collection processes.

A shorter average collection period indicates that a firm is collecting its receivables more quickly, suggesting that its credit policies may be effective in minimizing credit risk and maintaining cash flow. Conversely, a longer collection period could signal potential issues in the firm's credit practices, such as overly lenient credit terms or inefficiencies in follow-up on outstanding invoices. By regularly monitoring this metric, a company can assess and adjust its strategies to ensure better cash management and reduce the risk of bad debts.

Other metrics such as total asset turnover ratio, debt ratio, and fixed asset turnover ratio focus on different financial aspects, like asset utilization, capital structure, and operational efficiency related to fixed assets, rather than the specific evaluation of credit and collection processes.