Average Collection Period Calculator
Answers the Question
How long until we get paid?
Calculator for Average Collection Period
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
- 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.