Definition of Average Collection Period
The average collection period is the average number of days between 1) the dates that credit sales were made, and 2) the dates that the money was received/collected from the customers. The average collection period is also referred to as the days’ sales in accounts receivable.
Formula for Calculating the Average Collection Period
One formula for calculating the average collection period is: 365 days in a year divided by the accounts receivable turnover ratio.
An alternate formula for calculating the average collection period is: the average accounts receivable balance divided by the average credit sales per day.
Example of Average Collection Period
Assume that a company had on average $40,000 of accounts receivable during the most recent year. During that year the company had credit sales of $400,000.
One calculation of the average collection period is to first determine the accounts receivable turnover ratio, which is $400,0000 divided by $40,000 = 10 times per year. Since there were 365 days during the recent year, the average collection period is 365 days divided by the turnover ratio of 10 = 36.5 days.
Using the alternate formula we first determine the average credit sales per day, which is the $400,000 of credit sales divided by 365 days = $1,096. Next, the average accounts receivable balance of $40,000 is divided by the average credit sales per day of $1,096, which also results in 36.5 days.
The monitoring of the average collection period is one way to track a company’s ability to collect its accounts receivable.
