Average Collection Period

The average collection period is the average number of days it takes a company to collect its accounts receivable. It is calculated by dividing the total accounts receivable by the average daily sales. The average collection period is an important metric for measuring a company's liquidity and cash flow. A long average collection period can indicate that a company is having difficulty collecting its receivables, which can lead to cash flow problems. A short average collection period can indicate that a company is collecting its receivables quickly, which can improve its liquidity.

The average collection period can be calculated using the following formula:

Average collection period = (Accounts receivable / Average daily sales) * 365

Where:

• Accounts receivable is the total amount of money owed to a company by its customers.
• Average daily sales is the average amount of sales a company makes per day.
• 365 is the number of days in a year.

For example, if a company has $100,000 in accounts receivable and makes an average of $1,000 in sales per day, its average collection period would be 100 days.

The average collection period can be used to compare a company's performance over time or to compare it to other companies in the same industry. A company with a long average collection period may be at risk of cash flow problems, while a company with a short average collection period may be more liquid.

The average collection period is also a good indicator of a company's creditworthiness. A company with a long average collection period may be seen as a riskier investment than a company with a short average collection period.

The average collection period is an important metric for any company that sells on credit. By tracking its average collection period, a company can get a better understanding of its cash flow and creditworthiness.