## 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.