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# Average Collection Period Calculator

Average collection period definitionImportance of average collection periodHow to calculate average collection periodAverage collection period formulaExample of the average collection periodHow average collection period affects cash flowBest average collection period for your business

With the help of our average collection period calculator, you can track your accounts receivables, ensuring you have enough cash in hand to meet your alternate financial obligations.

The following article will explain in detail what the average collection period formula is, how it is used, and how it affects your cash flow.

## Average collection period definition

The average number of days between making a sale on credit, and receiving its due payment, is called the average collection period.

🔎 Another average collection period interpretation is days' sales in accounts receivable or the average collection period ratio.

You should monitor this metric to ensure your business collects payments in due time for other needs or expenses.

Also, you may compare your average collection period ratio with your terms of credit to help determine how practically feasible your credit terms are for your customers and improve the effectiveness of your credit and collection policies.

## Importance of average collection period

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.

This type of evaluation, in business accounting, is known as accounts receivables turnover. You can calculate it by dividing your net credit sales and the average accounts receivable balance. Alternatively, check the receivables turnover ratio calculator, which may help you understand this metric.

## How to calculate average collection period

Before you can calculate the average collection period, you'll need the following core information:

1. Average accounts receivable: Also called the amount of receivables or AR, which your business is owed within a particular duration.

2. Number of days that are in the respective duration of your average amount of receivables.

3. Total credit sales you've made in the same respective duration of your average amount of receivables. Use the sales calculator to find the net credit sales if you don't know it yet.

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.

💡 To calculate the average value of receivables, sum the opening and closing balance of your required duration and divide it by 2. You can also open the Calculate average accounts receivable section of the calculator to find its value.

🔎 You can also enter your terms of credit in our calculator to compare them with your average collection period.

## Average collection period formula

Here's the average collection period formula:

• ACP = AR × Days / TCS

where:

• ACP — Average collection period;
• AR — Accounts receivable; and
• TCS — Total credit sales.
1. Multiply the average accounts receivable with the respective number of days, for which you're calculating the average.

2. Divide the result by the total amount of credit sales made during the respective period.

💡 You can also use the same method to calculate your average collection period for a particular day by dividing your average amount of receivables by your total credit sales of that day.

• ACP = AR / TCS

Or multiply your annual accounts receivable balance by 365 and divide it by your annual net credit sales to calculate your average collection period in days for the entire year.

• ACP = AR × 365 / TCS

Once you have calculated your average collection period, you can compare it with the time frame given in your credit terms to understand your business needs better.

Below, you will find an example of how to calculate the average collection period.

## Example of the average collection period

In the following example of the average collection period calculation, we'll use two different methods.

Here, you can calculate your average collection period in two ways:

1. Calculating the average collection period with average accounts receivable and total credit sales.

To calculate your average collection period, multiply your average accounts receivable with the number of days in the year:

25,000 × 365 = 9,125,000

Now, divide it by your total credit sales:

9,125,000 / 100,000 = 91.25 days

The result above shows that your average collection period is approximately 91 days.

2. Calculating the average collection period with accounts receivable turnover ratio.

First, calculate your accounts receivable turnover ratio by dividing your net credit sales with your average accounts receivable:

100,000 / 25,000 = 4

Thus, in this case, your accounts receivable turnover ratio is 4 times per year.

Now, to calculate your average collection period, divide the number of days in the year by your accounts receivable turnover ratio:

365 / 4 = 91.25 days

The result above matches your previous calculation.

💡 By dividing your total credit sales by the number of days in a year, you can determine your daily average credit sales:

• 100,000 / 365 = 273.97 USD

And if you divide your average accounts receivable by your daily average credit sales, you get the average collection period:

• 25,000 / 273.97 = 91.25 days

## How average collection period affects cash flow

In the following scenarios, you can see how the average collection period affects cash flow.

For example, financial institutions, i.e., banks, rely on accounts receivable because they offer their customers credit loans, installments, and mortgages. A short and precise turnaround time is required to generate ROI from such services (you can find more about this metric in the ROI calculator). Thus, by neglecting their policies for managing accounts receivable, they can potentially have a severe financial deficit.

Similarly, a steady cash flow is crucial in construction companies and real estate agencies, so they can pay their labor and salespeople working on hourly and daily wages in a timely manner. 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.

💡 A simple average sale period formula is to divide your annual net sales by the number of months in a year:

• Annual net sales / 12

Since we mentioned loans, we encourage you to check our awesome mortgage calculator with colorful charts.

In the best-case scenario, the average number of days your customers take to repay the due amount, i.e., your average collection period, should be less than, or very close to your credit terms, but no greater than a third of your credit terms.

For instance, if your customers have 30 days to pay their bills, their average collection ratio should not extend beyond 40 days. You can calculate this margin as follows:

• (30)/3 + 30 = 40 days

If your average collection period is lower than your terms of credit, it shows a positive cash flow trend. But if this number is higher, it means fewer customers are paying on time, and you should look into it now to avoid any future setbacks. 📈

Every business has its average collection period standards, mainly based on its credit terms.

Even though a lower average collection period indicates faster payment collections, it isn't always favorable. If customers feel that your credit terms are a bit too restrictive for their needs, it may impact your sales.

Thus, you can set up optimal credit terms depending on your available funds. But keep your credit utilization ratio in check so you don't go overboard. Our credit utilization calculator may be helpful in that case.

In the long run, you can compare your average collection period with other businesses in the same field to observe your financial metrics and use them as a performance benchmark.

We hope you now have a thorough understanding of what the average collection period is and how to find an average collection period to offer credit terms that are best suited for both your business and your clients.