This may also include limiting the number of clients it offers credit to in an effort to increase cash sales. It can also offer pricing discounts for earlier payment (i.e. 2% discount if paid in 10 days). The average collection period is closely related to the accounts turnover ratio, which is calculated by dividing total net sales by the average AR balance.

Once you have these numbers in hand, you’re ready to calculate the average collection period ratio. The first thing to decide is the time period you want to calculate the average for. Many accountants will use a one-year period (365 days), or an accounting year (360 days). You can also calculate the ratio for shorter periods, such as a single month. A lower average collection period is better for the company because it means they are getting paid back at a faster rate. This allows them to have more cash on hand to cover their costs and reinvest in the business.

Average collection period calculator

Average collection period can inform you of how effective—or ineffective—your accounts receivable management practices are. It does so by helping you determine short-term liquidity, which is how able your business is to pay its liabilities. If your goal is to collect within 30 days, then an average collection period of 27.38 would signal efficiency. If your average collection period was significantly longer than your target collection terms, that’s indicative of a need to improve your collections efforts. There are many ways you can improve your processes, ranging from simple—such as using collections email templates—to more transformative—like investing in accounts receivable automation software.

The average receivables collection period can be managed within the credit terms set out to customers. To calculate your total net credit sales, take your total sales made on credit for a given period and subtract any returns and sales allowances. It’s vital that your accounts receivable team closely monitor this metric and keep it as low as possible.

Established or a Startup, Every Business Needs a Good Average Collection Period

However, we recommend tracking a series of accounts receivable KPIs and to develop a system of reporting to more accurately—and repeatedly—gauge performance. Not all metrics work for all businesses, so having an abundance of performance indicators is more valuable than relying on a single number. With an accounts receivable automation solution, you can automate tedious, time-consuming manual tasks within your AR workflow. For instance, with Versapay you can automatically send invoices once they’re generated in your ERP, getting them in your customers’ hands sooner and reducing the likelihood of invoice errors. Here are a few of the ways Versapay’s Collaborative AR automation software helps bring down your average collection period, improve cash flow, and boost working capital. More specifically, the company’s credit sales should be used, but such specific information is not usually readily available.

Also, remember that there is a difference between net sales and net credit sales. While net sales look at the total sales after returns, allowances, and discounts. Since we are focusing on credit collection, this would not apply to cash sales. When you use the average https://turbo-tax.org/reconciliation/ it not only saves you time but also lets you do your calculations in the comfort of your own office. Using an online calculator to calculate Average Collection Period is also useful for the following reasons. To address your average collection period, you first need a reliable source of data.

What is average collection period?

It might, at this point, be an idea to offer a small discount on payment within a certain time or other favorable terms to increase the speed of payment. Make things easy by connecting with your customers using an intuitive, cloud-based collaborative payment portal that empowers them to pay when and how they want. In the first formula, to calculate the Average collection period, we need the Average Receivable Turnover, and we can assume the Days in a year as 365. On average, the Jagriti Group of Companies collects the receivables in 40 Days. We’ll use the ending A/R balance for our calculations here and assume the number of days in the period is 365 days. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

When it comes to growing your business further it’s quite beneficial as it helps measure and improve average collection period, which means more cash flow. Average collection period measures the average number of days that accounts receivable are outstanding. This activity ratio should be the same or lower than the company’s credit terms.