What Is the Average Collection Period Formula? Definition + Examples

The monitoring of the average collection period is one way to track a company’s ability to collect its accounts receivable. Jason is the senior vice president of Bill Gosling Outsourcing’s offshore location in the Philippines. He began this role in 2012 and was an integral part of the company’s development. Jason has over 10 years of experience in international operations; he managed all aspects of operations, profitability, and business development for Convergys’ offshore accounts receivable management. By comparing with the industry standard, a company can understand whether its DSO is acceptable, or can be improved. At the same time, the company’s past performance gives an idea of whether the collection process of a business is improving over time.

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How to Calculate Your Average Collection Period Ratio

In specific terms, the average collection period denotes the days between when a customer buys the product and makes the full payment. The average collection period for account receivables tells you which client pays earlier and which prolongs dues. Knowing their payment patterns, you can modify and effectuate your communication with them and follow-up messages. This value is based on how quickly you collect payments from your customers. Average collection period analysis can throw light on many takeaways that will help you understand your company more. Additionally, since construction companies are typically paid per project , they also depend on this calculation. Since payments on these projects can fund other projects, they need to make sure clients are paying on time and in the correct amounts.

The average collection period is also referred to as the days to collect accounts receivable and as days sales outstanding. Average collection periods are calculated by dividing the average accounts receivable amount for https://www.bookstime.com/ a period by the net credit sales for the period and multiplying by the number of days in the period. The result of this formula shows how long it takes on average to collect payments from sales that were made on credit.

Net Credit Sales

It may mean that the company isn’t as efficient as it needs to be when staying on top of collecting accounts receivable. However, the figure can also represent that the company offers more flexible payment terms when it comes to outstanding payments. The average collection period is the length of time – on average – it takes a company to receive payments in the form of accounts receivable. The numerator of the average collection period formula shown at the top of the page is 365 days. For many situations, an annual review of the average collection period is considered.

Net credit sales equal total credit sales after factoring all returns during the accounting period. Average account receivables are calculated by finding the simple average of the total account receivables at the start of the period and account receivables at the end of the period. Often a company accounts for its outstanding account receivables on a weekly or monthly basis and for longer periods the figures can be average collection period formula found in the income statements of the company. Companies create their credit policies based on when they need payments from their customers. These incoming payments go to pay suppliers, as well as other business expenses such as salaries, rent, utilities, and inventory. When customers are late in paying their accounts, a company may have to delay paying its business expenses or purchasing additional inventory.