Average Collection Period Formula, How It Works, Example

Content

Average collection period examples
How Is the Average Collection Period Calculated?
Limitations of the Average Collection Period Ratio
Summary Definition
What does an average collection period of 30 days indicate for a company?
Importance of Accounts Receivable Ratio

average collection period

In addition, the ACP can be used to benchmark a company’s performance against its peers. A lower average collection period indicates the company is collecting payments faster, which sounds great in theory, but there is a downside in collecting payments too fast. If customers think your credit terms are too strict, they could seek other providers with more flexible payment options. Your company has to find the average collection period and credit policies that work best for your business’s needs, but that also won’t deter your customers from doing business with you. You can find your average accounts receivable by adding accounts receivables totals from the beginning and end of the period then dividing by two. If you have financial statements available from each month or quarter of the period, you may also average the amounts found on your past balance sheets for a more accurate number.

average collection period

With Versapay, your customers can make payments at their convenience through an online self-service portal. Today’s B2B customers want digital payment options and the ability to schedule automatic payments. With traditional accounts receivable processes, there’s a significant communication gap between AR departments and their customers’ AP departments.

Average collection period examples

ScaleFactor is on a mission to remove the barriers to financial clarity that every business owner faces. It is important to know the industry before judging an average collection period. Show bioTammy teaches business courses at the post-secondary and secondary level and has a master’s of business administration in finance.

The Uganda National Roads Authority has said that the average monthly road toll collection from the modern Kampala Entebbe Expressway is much higher than planned which might see the loan for it paid in a short period of time.

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— The New Vision (@newvisionwire) August 24, 2022

By subtracting 30 days from 36.5 days, he sees that they’re also 6.5 days late, which affects the store’s ability to pay its bills. A construction company is often paid a portion of the cost up front and the rest is paid on completion of the building or other large project. Depending on the length of the project, it could be a long time the company is working on credit or just a short period of time. Some construction companies balance their short and long term projects to improve their average collection period. To avoid this, companies should analyze their clients first, before extending credit lines to them. If a client has a history of late payments with other suppliers, the company should not provide goods or services through credit, as the collection of such sales will probably be difficult.

How Is the Average Collection Period Calculated?

To calculate your average accounts receivable, take the sum of your starting and ending receivables for a given period and divide this by two. The average collection period is primarily a measure of liquidity—it measures how quickly a business can turn sales into cash. If a business’s liquidity is decreasing, it may check the average collection period to see if that’s the reason behind the declining liquidity. If a business’s average collection period is improving, but its liquidity is getting worse, then that means the business is having issues in other aspects of its business. Your average collection period will depend on the type of business you run. Regardless of what’s normal in your industry, knowing the average collection period will help you understand the liquidity of your firm.

The average accounts receivable formula is defined as the average of the beginning accounts receivable and ending accounts receivable for the collection period.
This includes any discounts awarded to customers, product recalls or returns, or items re-issued under warranty.
We also provide you with the Average Collection Period calculator along with a downloadable excel template.
Some construction companies balance their short and long term projects to improve their average collection period.
Read on to learn more about the average collection period to determine the overall efficiency of accounts receivables for your business or organization.

November 2, 2022