how average collection periods work
accounts receivable is a business term used to describe money that entities owe to a company when they purchase goods and or services companies normally make these sales to their customers on credit ar is listed on corporations balance sheets as current assets and measures their liquidity as such they indicate their ability to pay off their short term debts without the need to rely on additional cash flows the average collection period is an accounting metric used to represent the average number of days between a credit sale date and the date when the purchaser remits payment a company s average collection period is indicative of the effectiveness of its ar management practices businesses must be able to manage their average collection period to operate smoothly a lower average collection period is generally more favorable than a higher one a low average collection period indicates that the organization collects payments faster however this may mean that the company s credit terms are too strict customers who don t find their creditors terms very friendly may choose to seek suppliers or service providers with more lenient payment terms formula for average collection periodaverage collection period is calculated by dividing a company s average accounts receivable balance by its net credit sales for a specific period then multiplying the quotient by 365 days average collection period 365 days average accounts receivables net credit sales alternatively and more commonly the average collection period is denoted as the number of days of a period divided by the receivables turnover ratio the formula below is also used referred to as the days sales receivable ratio average collection period 365 days receivables turnover ratiothe average receivables turnover is simply the average accounts receivable balance divided by net credit sales the formula below is simply a more concise way of writing the formula for the formulas above average accounts receivable is calculated by taking the average of the beginning and ending balances of a given period more sophisticated accounting reporting tools may be able to automate a company s average accounts receivable over a given period by factoring in daily ending balances 