Average Collection Period Calculator

Calculate how long it takes your business to collect payments from customers and assess the efficiency of your accounts receivable management.

Calculate Your Average Collection Period Calculator

The total amount owed by customers for goods or services delivered

The total sales made on credit for the year

Collection Period Analysis

Average Collection Period

91.3 days

Receivables Turnover Ratio

4.00x per year

Your collection period is long, which could negatively impact cash flow. Consider revising your credit policies and collection procedures.

What is Average Collection Period?

The Average Collection Period (ACP) is a financial metric that measures the average number of days it takes for a company to collect payment after a credit sale has been made. It indicates how efficiently a company manages its accounts receivable and collects money from its customers.

How to Calculate Average Collection Period

The formula to calculate the Average Collection Period is:

Average Collection Period = (Accounts Receivable ÷ Annual Credit Sales) × 365

This calculation can also be broken down into two steps:

  1. Calculate the Receivables Turnover Ratio = Annual Credit Sales ÷ Accounts Receivable
  2. Calculate the Average Collection Period = 365 ÷ Receivables Turnover Ratio

Why the Average Collection Period Matters

  • Cash Flow Management: A shorter collection period improves cash flow and working capital.
  • Credit Policy Effectiveness: It indicates how effective your credit and collection policies are.
  • Customer Relationships: It can reflect the quality of customer relationships and satisfaction.
  • Financial Health: Extended collection periods may indicate customers are experiencing financial difficulties.
  • Industry Comparison: Comparing your ACP to industry averages helps assess your competitive position.

Strategies to Improve Your Collection Period

  • Tighten Credit Policies: Implement more stringent credit checks for new customers.
  • Offer Early Payment Discounts: Encourage customers to pay earlier with incentives.
  • Automate Invoicing: Send invoices immediately after delivering goods or services.
  • Implement Clear Payment Terms: Ensure customers understand when payment is expected.
  • Follow Up Proactively: Contact customers before invoices are due to confirm receipt.
  • Accept Multiple Payment Methods: Make it easier for customers to pay using their preferred method.
  • Use Electronic Payment Systems: These typically process payments faster than traditional methods.

Limitations of the Average Collection Period

While the Average Collection Period is a valuable metric, it has some limitations:

  • It uses averages, which may not reflect seasonal variations in sales or collections.
  • It doesn't account for the aging of individual accounts receivable.
  • Industry norms vary significantly, making cross-industry comparisons less meaningful.
  • It doesn't differentiate between different customer segments or markets.

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Frequently Asked Questions

A good average collection period depends on your industry and business model, but generally, 30-45 days is considered good for most businesses. Shorter periods (under 30 days) indicate excellent collection efficiency, while longer periods (over 60 days) may suggest collection issues. Compare your results with industry benchmarks for the most relevant assessment.

The average collection period directly impacts your company's cash flow and working capital. A shorter period means faster cash inflows, which can be used to fund operations, pay debts, or invest in growth. Conversely, a longer period ties up capital in accounts receivable, potentially causing liquidity problems and increasing the risk of bad debts.

Yes, seasonal fluctuations can significantly impact the average collection period. During peak seasons, increased sales volume might temporarily lengthen the collection period if collection resources aren't scaled accordingly. Conversely, during slow periods, the ratio might appear better as fewer new receivables are created. For businesses with strong seasonality, calculating this metric quarterly or monthly provides more accurate insights.

No, the average collection period formula specifically uses credit sales, not total sales. Including cash sales (where payment is received immediately) would artificially lower your average collection period and provide misleading results. If you don't track credit sales separately, you'll need to estimate the proportion of your total sales made on credit.

The average collection period works well alongside other working capital and efficiency metrics like the accounts payable period, inventory turnover, and cash conversion cycle. Together, these metrics provide a comprehensive view of your working capital management. Also, comparing your collection period with your payment terms can reveal how effectively your stated credit policy translates into actual customer payment behavior.

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