Average Collection Period: Overview, Formula & Example

Adjust your accounts receivable in line with this process and strategically manage both payment sections. The average collection period for account receivables can help you with future financial planning. Here is how the calculation of average collection period plays a role in your accounts receivable. This value is based on how quickly you collect payments from your customers. Average collection period analysis can throw light on many takeaways that will help you understand your company more.

1. Most companies try to clear their outstanding accounts payable within a month.
2. Here is how the calculation of average collection period plays a role in your accounts receivable.
3. Expecting to pay quicker might appear like a stringent rule and push them to find alternative providers.
4. While seeking payments and retaining customers, one can easily miss out on timings.

When bill payments are delayed, your cash reserve will deteriorate, and you will have low or zero access to funds. In specific terms, the average collection period denotes the days between when a customer buys the product and makes the full payment. Monitoring your financial health is important to maintain a positive cash flow and sustain growth. The average collection period will tell you what your financial health looks like in the near future. When you know the current balance of your account, you can schedule and plan your future expenses accordingly. While seeking payments and retaining customers, one can easily miss out on timings.

While ACP holds significance, it doesn’t provide a complete standalone assessment. It’s essential to compare it with other key performance indicators (KPIs) for a clearer understanding. This way, you’ll get more nuanced, actionable insights that can fuel business growth. That’s why it’s important not to take this metric at face value; be mindful of external factors that influence it. If you analyze a peak or slow month in isolation, your insights will be skewed, and you can’t make import transactions into xero sound decisions based on those numbers.

Average collection period formula

However, the ideal number depends on the nature of your business, client relationships, and invoice period. According to a PYMNTS report, 88% of businesses automating their AR processes see a significant reduction in their DSO. Automation can also help reduce manual intervention in collection processes, enabling proactive communication with customers and helping in the establishment of appropriate credit limits. This comparison includes the industry’s standard for the average collection period and the company’s historical performance. Every business has its average collection period standards, mainly based on its credit terms. 🔎 You can also enter your terms of credit in our calculator to compare them with your average collection period.

Without tracking the ACP, it will become difficult for businesses to plan for future expenses and projects. Here are two important reasons why every business needs to keep an eye on their average collection period. The average receivables turnover is simply the average accounts receivable balance divided by net credit sales; the formula below is simply a more concise way of writing the formula. Industries such as banking (specifically, lending) and real estate construction usually aim for a shorter average collection period as their cash flow relies heavily on accounts receivables. On the discount on notes payable other end of the spectrum, businesses that offer scientific R&D services can have an average collection period of around 70 days. Or multiply your annual accounts receivable balance by 365 and divide it by your annual net credit sales to calculate your average collection period in days for the entire year.

Shortening bank processing time

Alternatively, check the receivables turnover ratio calculator, which may help you understand this metric. To measure the number of days it takes for a company to receive payments for its sales, companies and analysts primarily use the average collection period metric. The average collection period is the primary industry standard for evaluating a company’s accrual accounting procedures and assessing its expectations for cash flow management.

Average Collection Period

By automating their AR process with HighRadius Autonomous Receivables, businesses can significantly improve their order to cash cycle. Utilize this calculator to assess the cash flowgenerated by your business. Let us now do the average collection period analysis calculation example above in Excel.

Plus, the impact is greater for professional service companies, as you don’t have physical assets or products to fall back on to recuperate those losses. Average collection period refers to how long it typically takes to collect payment from your customers after you’ve delivered a product or services, i.e., accounts receivables. In other words, it’s the average period of time between the “sale” or completion of services and when customers make payment for a given period.

AR is listed on corporations’ balance sheets as current assets and measures their liquidity. As such, they indicate their ability to pay off their short-term debts without the need to rely on additional cash flows. Another common way to calculate the average collection period is by dividing the number of days by the accounts receivable turnover ratio. A more extended average collection period also increases the chances of growing customer debt or accounts receivable (AR) going unpaid.