The average collection period is a key metric that every business owner should know, as it has an impact on cash flow. Understanding the average collection period for your business—and how to interpret the results—will help you improve financial performance and make better decisions about inventory, staffing, and other resources.

## Average collection period definition

The average collection period is the average number of days it takes to collect payment from your customers. This number is also known as the average day sales outstanding (DSO). It’s a financial ratio that measures the average number of days that the company holds accounts receivable.

## Importance of average collection period

The average collection period is the average time it takes to collect a debt. It’s calculated by dividing the total amount of accounts receivable (money owed) by the total number of days it took to collect that money.

The average collection period formula is:

\text {Average Collection Period} = \frac {\text {Total Accounts Receivable}} { \text {Total Number of Days in Company History}}

## How to calculate the average collection period?

The Average Collection Period (ACP) is the average length of a company’s accounts receivable (AR) period. It is expressed in a number of days and gives you an idea of how soon a company will be able to collect its outstanding invoices. It helps measure your credit risk and also helps lenders decide whether they would like to lend money to your business or not.

For example, if Company XYZ sold $10,000 worth of products daily during 2017 with total sales amounting to$50 million and ending December 31st, 2017 with an AR balance of $30 million then their ACP will be calculated as follows: ## Example of the average collection period When a company is short on cash, it will often look for ways to collect more quickly. This can be done by increasing the average collection period (ACP). The ACP is the average number of days between the date of invoice and the date of cash collection. It is a measure of the average time it takes to collect payment for invoiced goods or services provided by a business. ## How average collection period affects cash flow The average collection period is the average time it takes for customers to pay off their invoices. The longer the average collection period, the more cash you will need on hand to meet your obligations and keep the business running smoothly. As an example, imagine you have a credit card processing system that takes 1% of each transaction as a fee. If you get$100 in sales today, that means $1 in transaction fees; if half of your customers pay with credit cards and half with debit cards (which take three days to clear), then by tomorrow your account should be down by$50—enough money to cover all of those transactions plus some extra left over! In this case, since both types of payments have an equal chance of coming through within three days and only one type comes through faster than expected (debit cards), we can say our overall average collection period was two days: one day for credit card transactions versus two days for debit card transactions.

The average collection period is another important metric that businesses use to measure their cash flow. It’s the average amount of time it takes for your customers to pay their bills, including payment terms and discounts.

The longer it takes for your customers to pay their bills, the greater risk you’re taking on as a business owner. You may need cash reserves or additional financing in order to cover costs such as paying rent or salaries during this time period.

## Average collection period example

Let’s take an example to understand the concept of average collection period and how it is calculated using the average collection period calculator.

Suppose a business has an accounts receivable balance of $50,000 and an average daily sales of$1,000. To calculate the average collection period, we use the following formula:

Average Collection Period = Accounts Receivable Balance / Average Daily Sales

Plugging in the numbers from our example, we get:

Average Collection Period = $50,000 /$1,000 = 50 days

This means that on average, it takes the business 50 days to collect payments from its customers. By using the average collection period calculator, the business can easily monitor its accounts receivable turnover and identify potential cash flow issues. It can then take appropriate measures, such as tightening credit policies or offering discounts for early payments, to improve its cash flow situation.

In conclusion, the average collection period is a crucial metric for businesses to monitor their cash flow and manage their finances effectively. The average collection period calculator simplifies the calculation process, making it easier for businesses to track their average collection period and take appropriate measures to improve their cash flow management.

## Average collection period higher or lower better

In general, a lower average collection period is considered better because it indicates that a business is able to collect payments from its customers more quickly, which in turn improves its cash flow position. A lower average collection period means that a business is able to convert its accounts receivable into cash more quickly, which can be used to fund its operations, pay bills, and invest in growth.

On the other hand, a higher average collection period indicates that a business is taking longer to collect payments from its customers, which can lead to cash flow issues and impact its ability to manage its finances effectively. A high average collection period can also indicate that a business is facing issues with creditworthiness of its customers or its credit policies.

Therefore, businesses should strive to keep their average collection period as low as possible to ensure optimal cash flow management and financial stability.

## FAQ

### What is the formula for the average collection period?

The average collection period is calculated by dividing a company’s yearly accounts receivable balance by its yearly total net sales; this number is then multiplied by 365 to generate a number in days.

### What is a good average collection period?

A shorter average collection period (60 days or less) is generally preferable and means a business has higher liquidity.

### What is a good collection percentage?

In general, a net collection percentage of 97 percent or higher will help ensure a healthy bottom line for the practice.