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Average Collection Period; Days Average Collection Rate
The average collection period is the time it takes for a company to receive payments owed by its customers. The average collection period is the dollar weighted average amount of time it takes a company to convert accounts receivable into cash. It is an important tool used by many organizations to measure or monitor the work performed by the credit department to encourage prompt payment and control payment delinquencies. The longer the average collection period, the higher the DSO and the higher the investment in accounts receivable. The lower the number, the more efficient the creditor company is at collecting on its credit (open account) sales. The formula for calculating the Average Collection Period is:
Average Accounts Receivable / (Credit Annual Sales / 365)
Many people prefer to see the average collection period expressed in days as results from the formula above. It is more readily understood when examining changes in collections from one period to the next.
Edited by Michael C. Dennis and Michael Zininberg. Mr. Dennis is a business credit consultant.