What is the average collection period

Figuring the Average Collection Period of a business allows the management team to measure the efficiency of their Billing Teams and processes. If the ACP is higher than the average credit period extended to clients, as seen in the example above, it means the Billing Process is not working as it should.

In most cases, this may be due to a lack of follow up or because of bad credit lines that should have never been extended in the first place. To avoid this, companies should analyze their clients first, before extending credit lines to them. If a client has a history of late payments with other suppliers, the company should not provide goods or services through credit, as the collection of such sales will probably be difficult.

Additionally, administrative systems should provide the Billing Team with reminders of due invoices, to prompt them to follow up in order to reduce the ratio. A company with a consistent record of failing to collect its payments on time will eventually succumb to financial difficulties due to cash shortages, as its cash cycle will be extended.

This is also a costly situation to be in, as the company will have to take debt to fulfill its commitments and this debt carries interest charges that will reduce earnings. For example, if a company has a collection period of 40 days, it should provide the term as days. The collection period may differ from company to company.

A company may sell seasonally. In that case, the formula for the average collection period should be adjusted as per the necessity. This is very simple.

You need to calculate the average accounts receivable, find out the accounts receivables turnover ratio. And then find the collection period. This has been a guide to the Average Collection Period. A high average collection period ratio could indicate trouble with your cash flows.

Now you want to go about calculating your average collection period ratio. Are you collecting accounts in a timely manner, or is this something your team needs to work on?

The first thing to decide is the time period you want to calculate the average for. Many accountants will use a one-year period days , or an accounting year days. You can also calculate the ratio for shorter periods, such as a single month. Find this number by totaling the accounts receivable at the start and at the end of the period. Divide this number by two to find the average. Finally, you need the net credit sales for the period.

This number is the total number of credit sales for the period, less payments you received. Measure ad performance. Select basic ads. Create a personalised ads profile.

Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Business Finance Small Business. By Rosemary Carlson.

She has consulted with many small businesses in all areas of finance. She was a university professor of finance and has written extensively in this area.