# Average Collection Period Calculator

How long until we get paid?

## What Is the Average Collection Period?

This formula is used for understanding how long a business should expect to wait for the money owed by its customers.

## Why Is it Important?

• The longer it takes to get paid, the worse cash flow becomes and the less money a firm has to pay its own bills or invest in new opportunities.
• The lower its average collection period, the more quickly the firm received the money that it is owed.
• Increases to the average collection period may indicate increasing risk of payment by customers.

## Formula(s) to Calculate Average Collection Period

• AVERAGE COLLECTION PERIOD = ACCOUNTS RECEIVABLE / CREDIT SALES * NUMBER OF DAYS IN A YEAR

## Common Mistakes

• Misunderstanding what the word average means in this context. It doesn't refer to the average payment, but the average dollar that is owed.
• Pushing for payment terms that are so short that it pushes away potential customers.
• Assuming that all well-run firms should have similar values for their average collections periods. Different industries have very different norms.
• Thinking that it's all up to a firm's customers. Many businesses have realized that it is worth providing discounts for early payment in order to reduce the average collection period.
• Note realizing that sometimes it is worth increasing average collection period may make sense, if it is accompanies by additional fees and charges.