how to use average collection period
the average collection period does not hold much value as a stand alone figure instead you can get more out of its value by using it as a comparative tool the best way that a company can benefit is by consistently calculating its average collection period and using it over time to search for trends within its own business the average collection period may also be used to compare one company with its competitors either individually or grouped together similar companies should produce similar financial metrics so the average collection period can be used as a benchmark against another company s performance companies may also compare the average collection period with the credit terms extended to customers for example an average collection period of 25 days isn t as concerning if invoices are issued with a net 30 due date however an ongoing evaluation of the outstanding collection period directly affects the organization s cash flows the average collection period is often not an externally required figure to be reported it is also generally not included as a financial covenant the usefulness of average collection period is to inform management of its operations example of average collection periodas noted above the average collection period is calculated by dividing the average balance of ar by total net credit sales for the period then multiplying the quotient by the number of days in the period let s say a company has an average ar balance for the year of 10 000 the total net sales that the company recorded during this period was 100 000 we would use the following average collection period formula to calculate the period 