Average Collection Period Calculator

What is the Average Collection Period?

The Average Collection Period refers to the average number of days it takes a business to collect payments from its credit sales. This metric gives insight into how effective a company is at managing its receivables and maintaining a healthy cash flow.

A shorter collection period typically indicates that a company is efficient at collecting debts, while a longer period may suggest issues in credit policy or customer payments.

Formula for Average Collection Period

There are two ways to express the formula for the Average Collection Period. Both yield the same result:

Formula 1:

$\text{Average Collection Period (ACP)}=\frac{\text{Average Accounts Receivable}}{\text{Net Credit Sales}}\times \text{Duration}$

Terms Explained

• Duration: The time frame for which you're measuring (typically 365 days for a year).
• Average Accounts Receivable: The average amount owed to the business by customers during the period.
• Net Credit Sales: The total credit sales (sales made on account) minus any returns or allowances.

Why is the Average Collection Period Important?

The ACP is a key performance indicator in financial analysis. It helps:

• Assess the effectiveness of credit and collection policies.
• Improve cash flow forecasting and planning.
• Identify potential issues in accounts receivable management.
• Make decisions about extending credit to customers.

Example Calculation

Let’s say:

• Duration = 365 days
• Average Accounts Receivable = $30,000
• Net Credit Sales = $180,000

We apply the formula:

$\text{ACP}=\frac{30,000}{180,000}\times 365=0.1667\times 365=60.83\text{ days}$

So, the Average Collection Period is approximately 60.83 days.

Conclusion

The Average Collection Period is a crucial indicator of how quickly a business collects its receivables. Monitoring this number can help ensure liquidity, maintain operational efficiency, and reduce the risk of bad debts. Use our calculator regularly to keep your business finances on track.