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.
Related or Semi-related Video
Finance: What is a regular way contract?1 Views
Finance a la shmoop what is a regular way contract?
alright well for centuries the church has condemned anything but the regular [Men appear in church]
way but then some wise guy posited a question about anything but so then some
wise Torah scribe added an extra letter T there and well everything was a mess [Person wiping letter T out]
and well "regular way" just stopped really being a thing anyway in
finance land regular way simply describes a securities trade when trades
settle regular way, it means that they follow the normal T plus 3, T plus 5, T
plus whatever days that's accorded whatever trade it is they're making a
corporate debt trade well that's usually T plus 3 or 3 days regular way would
imply that the corporate debt will settle in the regular three-day time [Amount owed appears on corporate debt timeline]
period the foreign exchange trade for a stock well that's usually 2 days T plus
2 would be the regular way the basic idea is that there are so many trades
and trade types now that happen in a non regular way because of some weird
restriction or government filing requirement or computer hacking that
happened out there or other global event that precluded things going the au
natural or regular way that noting when something trades regular way [People shouting at trading company]
actually has become a thing like we actually have to call it out when things
happen normally and if you have any questions about what's kosher or not in
regular ways well we suggest you consult your religious scribe or book in
whatever form it comes in it's not our business [Man asking priest questions]
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