Average Collection Period

If you are wondering why your business is always short on cash, you might take a look at your average collection period. This is the average number of days between the date that you make a sale on credit and the date you actually get the money in your hands.

The lower the average the better, although you might be annoying your customers if you offer less than 30 days’ payment terms. So it’s always a good idea to compare your average with that of the competition.

One way to calculate your average collection period is to take the average accounts receivable balance for a year and divide that by your credit sales per year. To get the average accounts receivable balance take the AR number at the beginning of the year, add the AR balance at the end of the year and divide by 2. So if your balance is $40,000 at the beginning of the year and $20,000 at the end of the year, add them together and divide by 2 to get $30,000. Then divide that by your total net sales of $300,000 per year and multiply by 365 days to the average collection period of 36.5 days. Not too bad.

Some companies offer a 1%-2% discount for paying on time, while others get on the phone and make friendly collection calls so that they are able to pay their own bills.