What is the average collection period?
The average collection period is the average number of days between 1) the date that a credit sale is made, and 2) the date that the money is received from the customer. The average collection period is also referred to as the days’ sales in accounts receivable.
The average collection period can be calculated as follows: 365 days in a year divided by the accounts receivable turnover ratio. Assuming that a company has an accounts receivable turnover ratio of 10 times per year, the average collection period is 36.5 days (365 divided by 10).
An alternate way to calculate the average collection period is: the average accounts receivable balance divided by average credit sales per day.
If a company offers credit terms of net 30 days, the company may find that its average collection period is actually 45 days or more. Monitoring the average collection period is important for a company’s cash flow and its ability to meet its obligations when they come due.
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