Average Collection Period
What is average collection period? Average collection period is the number of days on average it takes a company to collect its credit accounts or accounts receivables. In other words, average collection period is the number of days it takes to convert receivables into cash.
To calculate average collection period, average accounts receivables tends to come from balance sheet and annual credit sales from income statement. We multiply the average accounts receivable by 365 and then divide the result by annual credit sales. The final result is the number of days. Not that a sort period doesn’t necessarily mean that the company is doing well in terms of collecting their receivables. We need to compare this data to industry average and/or against the company’s historic data.
We also figure out the Average collection period from Accounts receivables turnover ratio. We simply need to divide 365 by average receivables turnover ratio to determine the average collection period.
Use the Calculator above to calculate average collection period in both method. However, below is an example of average collection period calculation.
In 2009 XYZ Corporation had credit sales of $25,000. The Corporation had beginning Account Receivable of $12,000 and ending Account Receivable of $15,000. What is the average collection period?
Average Accounts Receivable = $12,000 + $15,000 = $27,000/2 = $13,500
$13,500 * 365 / $25,000 = 197.1 days
Accounts Receivables Turnover
Inventory Turnover Ratio
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