Average Collection Period Calculator

Average Collection Period Calculator

The average collection period measures the average number of days it takes for a business to receive cash payments from its credit customers. It is a critical financial indicator used by managers, investors, and creditors to evaluate a company's short-term liquidity, credit policies, and overall operational efficiency.

Average Collection Period Formula

To calculate the average collection period, we first need to determine the accounts receivable turnover ratio. This ratio indicates how many times a business collects its average accounts receivable balance during a given period:

$$\text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}$$

Where the average accounts receivable is calculated as:

$$\text{Average Accounts Receivable} = \frac{\text{Beginning Accounts Receivable} + \text{Ending Accounts Receivable}}{2}$$

Using the turnover ratio, the average collection period (in days) is calculated as follows:

$$\text{Average Collection Period} = \frac{\text{Days in Period}}{\text{Accounts Receivable Turnover Ratio}}$$

Alternatively, the formula can be written as:

$$\text{Average Collection Period} = \frac{\text{Average Accounts Receivable} \times \text{Days in Period}}{\text{Net Credit Sales}}$$

Why is Average Collection Period Important?

A lower collection period is generally preferred because it means the company receives cash quickly, which can be reinvested to grow the business or pay off debts. A high collection period indicates that customers are slow to pay, which can lead to cash flow deficits and higher default risks.

However, credit policies must be balanced. If a company's collection period is extremely low, it might indicate that its credit policy is too restrictive, which could drive potential customers to competitors who offer more generous payment terms.

Check Out Other Financial Calculators

If you want to evaluate other areas of your business's financial health, check out our Acid Test Ratio Calculator to measure short-term liquidity, or the CAGR Calculator to determine compound annual growth rates. For investment asset valuations, you can use our Actual Cash Value Calculator.