A collection period is the average number of days required to collect receivables from customers. It is measured as the interval from the issuance of an invoice to the receipt of cash from the customer.
What is the average collection period for Company ABC?
For our example, the average collection period calculation looks like the one below: It means that Company ABC’s average collection period for the year is about 46 days. It is slightly high when you consider that most companies try to collect payments within 30 days. For the company, its average collection period figure can mean a few things.
What does a lower average collection period mean?
It means that a company’s clients take less time to pay their bills. Another way to look at it is that a lower average collection period means the company collects payment faster. A fast collection period may not always be beneficial as it simply could mean that the company has strict payment rules in place. The rules may work for some clients.
Why is a short collection period desirable?
A short period is desirable because the firm obtains cash more quickly for reinvestment or for paying its own bills. The collection period is calculated by dividing accounts receivable by average daily credit sales. Also called average collection period. Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott.
