Receivables Collection Period How to Calculate

The account receivable collection period of a business is the number of days it takes a business to recover its account receivable balances from the time of the initial credit sale. It has many uses such as allowing a business to evaluate its credit policies, helping in decision-making process, being an indicator of performance of the credit control department of the business, etc. It might also have some limitations when used on its own and must used as a comparison tool to produce useful results.

If your business follows suit by extending credit to customers, it becomes crucial to efficiently manage payment collections. Thus, the average collection period signals the effectiveness of a company’s current credit policies and A/R collection practices. Once a credit sale happens, the customers get a specific time limit to make the payment.

Terms Similar to Debtor Days

When comparing between two different businesses, it is important to understand the nature of the businesses. This check isn’t necessary when comparing businesses of the same nature or businesses that are in the same industry. By analysing the collection period-related figures, businesses can identify areas for improvement and take corrective action to ensure a healthy financial position.

1. So, in this line of work, it’s best to bill customers at suitable intervals while keeping an eye on average sales.
2. Furthermore, proactive and consistent communication with customers can significantly impact the collection period.
3. Let us now do the average collection period analysis calculation example above in Excel.
4. You need to calculate the average accounts receivable and find out the accounts receivables turnover ratio.

How Average Collection Periods Work

This means that, on average, it takes your company 91.25 days to collect payments from clients once services have been completed. In this article, we explore what the average collection period is, its formula, how to calculate the average collection period, and the significance it holds for businesses. The debtor collection period formula monitoring of the average collection period is one way to track a company’s ability to collect its accounts receivable. The average number of days between making a sale on credit, and receiving its due payment, is called the average collection period.

The best way that a company can benefit is by consistently calculating its average collection period and using it over time to search for trends within its own business. The average collection period may also be used to compare one company with its competitors, either individually or grouped together. Similar companies should produce similar financial metrics, so the average collection period can be used as a benchmark against another company’s performance. As demonstrated in the example above, the account receivable collection period on its own does not mean anything.

Net Credit Sales

This means that the company took an average of 49 days to collect its account receivables. This is 19 days (49 days – 30 days) longer than the agreed period with the customers. This means that the credit control department of ABC Co. has not performed according to the set standards. ABC Co. will have to tighten its controls over the receivable balance recovery systems. ABC Co. can also consider giving customers early settlement discounts to attract earlier payments.

This results in a 20% reduction in past-due accounts and a 30% increase in collector productivity. For example, if a company has a collection period of 40 days, it should provide days. Since the company needs to decide how much credit term it should provide, it needs to know its collection period.

Why Is It Critical to Track the Average Collection Period?

Alternatively, the measure can be compared to benchmark companies located outside of the industry to obtain the highest possible target figures to set as goals. In 2020, the company’s ending accounts receivable (A/R) balance was $20k, which grew to $24k in the subsequent year. Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.