Average Collection Period: Calculator, Examples, Ways to Improve

Instead of carrying out your collections processes manually, you can take advantage of accounts receivable automation software. Even better, when you opt for an AR automation solution that prioritizes customer collaboration, you can improve collection times even further by streamlining the way you handle disputes and queries. When assessing whether your average collection period is good or bad, it’s important you consider https://kelleysbookkeeping.com/what-is-a-vendor-logistics-terms-and-definitions/ the number of days outlined in your credit terms. While at first glance a low average collection period may indicate higher efficiency, it could also indicate a too strict credit policy. The time they require to collect the money back from the customer is known as the accounts receivable collection period. The average collection period for accounts receivable does more good if done frequently and properly.

Finance professionals weigh multiple factors to determine the average performance of their company. One of the important factors that highlight turnover and cash flow management is the average collection period. If this company’s average collection period was longer—say, more than 60 days— then it would need to adopt a more aggressive collection policy to shorten that time frame.

Average collection period example

Knowing the accounts receivable collection period helps businesses make more accurate projections of when money will be received. Even though ACP is an important metric for every business, it doesn’t portray much as a standalone unit. A few other KPIs that a company needs to compare it with, to get a clear picture of what the ACP indicates.

The average collection period is an indicator of the effectiveness of a firm’s AR management practices and is an important metric for companies that rely heavily on receivables for their cash flows. The average collection period (ACP) is an important metric for a company’s liquidity and credit risk. The ACP is the average amount of time it takes for a company to collect payments on its outstanding invoices. A shorter ACP indicates that a company is able to collect payments more quickly, which is a sign of a healthy liquidity position. A longer ACP can indicate that a company is having trouble collecting payments, which could be a sign of credit risk. In addition, the ACP can be used to benchmark a company’s performance against its peers.

What is the accounts receivable collection period?

Instead of having to remind your customers to pay with dunning letters and phone calls, you can deliver automated reminders before and after an invoice is due. In Versapay, you can segment customer accounts send personalized messages prompting your customers to remit payments on time. It’s vital that your accounts receivable team closely monitor this metric and keep it as low as possible.

Collecting its receivables in a relatively short and reasonable period of time gives the company time to pay off its obligations. To improve the average collection period, companies must become proactive in their collections approach. Automating the order to cash process to make it more efficient will also help reduce DSO.

Zero-touch collections

Otherwise, it may find itself falling short when it comes to paying its own debts. When analyzing average collection period, be mindful of the seasonality of the accounts receivable balances. For example, analyzing a peak month to a slow month by result in a very inconsistent average accounts receivable balance that may skew the calculated amount. If the accounts receivable collection period is more extended than expected, this could indicate that customers are not paying on time. 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.

• Companies may also compare the average collection period with the credit terms extended to customers.
• Liquidity is a financial measure of how instantly you can access cash for business expenses.
• In order to calculate the average collection period, divide the average balance of accounts receivable by the total net credit sales for the period.
• When disputes occur, there is often a string of back and forth phone calls that draws out the process of coming to an agreement and getting paid.
• Management has decided to grant more credit to customers, perhaps in an effort to increase sales.

A high ACP can indicate that a company is having difficulty collecting payments from its customers, which may lead to liquidity problems. Let’s start with a thorough definition.The accounts receivable collection period is the average length of time it takes a business to collect its outstanding invoices. A low collection period indicates that customers are paying their invoices quickly, while a more extended collection period Average Collection Period Definition shows customers may take too long to deliver. The average collection period (ACP) is a financial ratio that measures the average number of days it takes a company to collect payment from its customers. The ACP is calculated by dividing the total accounts receivable by the average daily credit sales. One example of average collection period is the time it takes for a company to collect payments from its customers on average.

Average collection period is the number of days between when a sale was made—or a service was delivered—and when you received payment for those goods or services. Learning how to calculate average collection period will help your accounts receivables team to find where they stand and take action to shorten their score. The average collection period is the average value of the duration when a business collects its payments from its customers. Let’s say that Company ABC recorded a yearly accounts receivable balance of $25,000. An increase in the average collection period can be indicative of any of the conditions noted below, relating to looser credit policy, a worsening economy, and reduced collection efforts.

• One of the important factors that highlight turnover and cash flow management is the average collection period.
• For example, analyzing a peak month to a slow month by result in a very inconsistent average accounts receivable balance that may skew the calculated amount.
• Collaborative AR automation software lets you communicate directly with your customers in a shared cloud-based portal, helping you resolve these problems efficiently.
• With traditional accounts receivable processes, there’s a significant communication gap between AR departments and their customers’ AP departments.
• To explain this better, let’s take a look at the hypothetical case of a company, ‘XYZ’.