Average collection period is the amount of days on average a company takes to collect money on their credit sales. Managers use this information to see how efficient their firm is on collecting their credit sales. The lower the number, the more efficient the company is at collecting on their credit sales. This is important as it gives managers a benchmark on how their firm is performing in comparison to their usual credit policies.
Determine the number of the company's working days in the year. For example, Firm A had 300 work days during the year.
Determine the average accounts receivable for the period. In the example, Firm A's beginning accounts receivable was $500,000 and their ending accounts receivable was $450,000, so the average accounts receivable was $475,000.
Determine the credit sales for the company during the period. Companies will disclose this information on their income statement. In the example, Firm A had $1,000,000 of credit sales during the period.
Multiply the number of work days by the average accounts receivable. In the example, 300 days times $475,000, equals $142,500,000.
Divide the number calculated in Step 4 by the company's credit sales to calculate average collection period. In our example, $142,500,000 divided by $1,000,000, which equals an average collection period of 142.5 days.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.