Average Collection Period

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What is the 'Average Collection Period'

The average collection period is the approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

Calculated as:

 

Average Collection Period

Where:
Days = Total amount of days in period
AR = Average amount of accounts receivables
Credit Sales = Total amount of net credit sales during period

BREAKING DOWN 'Average Collection Period'

For example, suppose that a widget making company, XYZ Corp, has total credit sales of $100,000 during a year (assume 365 days) and has an average amount of accounts receivables is $50,000. Its average collection period is 182.5 days.

Due to the size of transactions, most businesses allow customers to purchase goods or services via credit, but one of the problems with extending credit is not knowing when the customer will make cash payments. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash. Ultimately, every business needs cash to pay off its own expenses (such as operating and administrative expenses).

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RELATED FAQS
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    See how reducing a company's average collection period can help cash flow, and learn why collections practices are so important ... Read Answer >>
  2. Why is Average Collection Period important to a company?

    Discover why the average collection period can be a particularly important accounting ratio for a company that relies heavily ... Read Answer >>
  3. In which industries is Average Collection Period most important?

    Find out which industries are most concerned with average collection period, and how different types of companies interact ... Read Answer >>
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