It does so by helping you determine short-term liquidity, which is how able your business is to pay its liabilities. Average collection period (ACP) represents the average number of days it takes a company to receive payments owed to them from their customers after a service or sale occurs. On the other hand, the average payment period (APP) represents the average number of days a company takes to pay its supplier’s invoices after making credit-based purchases. When assessing whether your average collection period is good or bad, it’s important you consider the number of days outlined in your credit terms.

• If you analyze a peak or slow month in isolation, your insights will be skewed, and you can’t make sound decisions based on those numbers.
• This calculation helps financial managers track collection patterns and identify trends in customer payment behavior.
• The Credit Management Association’s 2024 Benchmarking Report indicates companies calculating trade receivables monthly identify payment delays 60% faster than quarterly monitoring.
• The Average Age of Debtors calculation determines the number of days receivables remain unpaid by dividing accounts receivable by net credit sales and multiplying by 365 days.
• Law firms, for example, reportedly saw an overall increase of 5% in the average collection cycle in 2023.

What Is Average Collection Period? – Formula and How to Calculate It

🔎 You can also enter your terms of credit in our calculator to compare them with your average collection period. The quicker a business collects its money owed, the faster it is able to reinvest or shop cash. Companies with brief series durations manipulate their cash float higher, which allows them to construct wealth through the years.

Analyze Payment Terms and Policies

This rapid collection cycle enables consistent cash flow for operational expenses and growth initiatives. A manufacturing company with beginning net accounts receivable of $800,000 and ending balance of $1,200,000 maintains an average net receivable balance of $1,000,000. Financial managers analyze this metric against industry benchmarks to optimize cash flow management and identify collection inefficiencies before they impact working capital availability. The Credit Research Foundation reports companies maintaining average net receivables below 40 days of sales achieve 30% better operational efficiency.

Regularly Calculate ACP

This increases the turnover charge, which is a sign of sturdy financial fitness. Financial literacy helps organizations improve their usual overall performance and stability. The average collection period with a debt turnover ratio of 4 equals 90 days (360 ÷ 4). According to the 2024 Financial Management Association’s Industry Standards Report, a 90-day collection period exceeds the optimal 45-day benchmark by 100%. For example, a manufacturing company improving its turnover ratio from 4 to 8 reduced its collection period from 90 to 45 days, freeing up $200,000 in working capital. The Accounts Receivable Turnover Ratio (ART) measures how efficiently a company collects payments by dividing net credit sales by average accounts receivable.

• This can have a damaging impact on cash flow and a company’s overall revenue and profitability.
• Companies rely on their average collection period to understand how effectively they’re managing cash flow and whether they must change their collections processes.
• Companies track their collection trends quarterly, implementing stricter credit policies if periods exceed industry standards.
• This results in a 20% reduction in past-due accounts and a 30% increase in collector productivity.
• If they have lax collection procedures and policies in place, then income would drop, causing financial harm.

The collection accounts receivable turnover ratio measures how many times a company collects its entire accounts receivable balance within a year. According to the Financial Analysts Journal’s 2024 Industry Benchmarks Report, companies with turnover ratios above 12 demonstrate 40% better working capital efficiency. For example, a retail company increased its ratio from 8 to 12 by implementing automated payment reminders, reducing its working capital needs by $200,000. A good accounts receivable turnover ratio ranges from 7.0 to 10.0 times per year for optimal business cash flow management. According to the 2024 Credit Management Association (CMA) benchmark study, companies maintaining an AR turnover ratio above 8.0 experience 30% fewer bad debt write-offs.

For example, a software company setting a 45-day collection period for enterprise clients while maintaining a 30-day period for small businesses achieves a 95% on-time payment rate. Companies customize collection periods based on customer segments, payment history, and industry standards while maintaining cash flow requirements. A higher DCR strengthens a company’s financial position by accelerating cash inflows. Companies maintain healthy DCR by implementing automated payment reminders, offering early payment discounts, and conducting regular credit checks on customers. The ratio directly impacts working capital availability for operational expenses, inventory management, and business growth initiatives.

However, it also means that they follow a very strict collection procedure which may also drive away customers because they prefer suppliers who have more flexible credit terms. The average collection period professional is closely related to the accounts turnover ratio, which is calculated by dividing total net sales by the average AR balance. Companies may also compare the average collection period with the credit terms extended to customers. For example, an average collection period of 25 days isn’t as concerning if invoices are issued with a net 30 due date. However, an ongoing evaluation of the outstanding collection period directly affects the organization’s cash flows. The average receivables turnover is the average accounts receivable balance divided by net credit sales.

The debtors ratio calculation requires dividing average accounts receivable by total credit sales and multiplying by 100 to get the percentage. According to the Financial Analysts Journal’s 2024 Corporate Finance Report, companies maintaining a debtors ratio below 15% experience 35% fewer bad debt losses. For example, a manufacturing company reduced its debtors ratio from 20% to 12% by implementing automated payment reminders, saving $150,000 in annual bad debt expenses.

No, receivables turnover ratio and collection period are different but complementary metrics measuring accounts receivable efficiency. According to the Association of Financial Professionals’ 2024 Metrics Study, while turnover ratio measures annual collection frequency, collection period measures the average days to collect payment. For example, a manufacturing company with a turnover ratio of 8 has a collection period of 45.6 days (365/8). Companies monitoring net accounts receivable trends identify payment pattern changes through monthly comparative analysis. These insights enable proactive credit policy adjustments, preventing cash flow disruptions that affect business operations. Organizations tracking this metric implement automated collection systems, resulting in 25% faster payment collection and improved working capital utilization for strategic investments.

Average collection period is important as it shows how effective your accounts receivable management practices are. This is especially true for businesses who are reliant on receivables in respect to maintaining cash flow. Efficient management of this metric is necessary for businesses needing ample cash to fulfill their obligations. Factors such as the company’s credit policy, the efficiency of its billing and collections processes, economic conditions, and customers’ financial health all influence how quickly customer payments are received.

This means that, on average, it takes your company 91.25 days to collect payments from clients once services have been completed. These elements allow businesses to evaluate collection efficiency and make informed decisions about credit and collection practices. Every business has its average collection period standards, mainly based on its credit terms. In the following scenarios, you can see how the average collection period affects cash flow.

Payment

Below, you will find an example of how to calculate the average collection period. Once you have the required information, you can use our built-in calculator or the formula given in the next section to understand how to find the average collection period. Schedule a consultation with capitalizethings.com financial analysts for customized accounts receivable strategies. In that case, the formula for the average collection period should be adjusted as needed.

For example, if analyzing a company’s full-year income statement, the beginning and ending receivable balances pulled from the balance sheet must match the same period. Average collection period is the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable (AR). Companies use the average collection period to make sure they have enough cash on hand to meet their financial obligations. If your average collection period is higher than you would like, this may signal challenges in unlocking working capital and hinder your business’ ability to meet its financial obligations. Slower collection times could result from clunky billing payment processes; or they might result from manual data entry errors or customers not being given adequate account transparency. Also, keep in mind that the average collection period only tells part of the story.

Best average collection period for your business

Instead, review your average collection period frequently and over a longer duration, such as a year. In the following example of the average collection period calculation, we’ll use two different methods. Capitalizethings.com expert financial advisory team provides comprehensive payment cycle analysis and working capital management strategies. Let us now do the average collection period analysis calculation example above in Excel. We will take a practical example to illustrate the average collection period for receivables. HighRadius’ AI-powered collections software helps prioritize worklists for the top 20% of customers and automates collections for 80% of long-tail customers.

This results in a 20% reduction in past-due accounts and a 30% increase in collector productivity. Instead of having to remind your customers to pay with dunning letters and phone calls, you can deliver automated reminders before and after an invoice is due. In Versapay, you can segment customer accounts send personalized messages prompting your customers to remit payments on time. To calculate your total net credit sales, take your total sales made on credit for a given period and subtract any returns and sales allowances. As we’ve said before, the average collection period offers limited insights when analyzed in isolation. To quantify how well your business handles the credit extended to your customers, you need to evaluate how long it takes to collect the outstanding debt throughout your accounting period.

Also, construction of buildings and real estate sales take time and can be subject to delays. So, in this line of work, it’s best to bill customers at suitable intervals while keeping an eye on average sales. Collection efficiency increases through regular monitoring of payment patterns and credit scoring updates. Businesses conduct monthly credit assessments of customers, establish payment milestones, and implement electronic payment systems to accelerate cash inflow.