What is the average collection period ratio?

The average collection period ratio calculates the average amount of time it takes for a company to collect its accounts receivable, or for its clients to pay. It can be calculated by multiplying the days in the period by the average accounts receivable in that period and dividing the result by net credit sales during the period.

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.

Why is a lower average collection period better?

For obvious reasons, the smaller the average collection period is, the better it is for the company. 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.

What is average collection period & receivables turnover?

Average Collection Period = 365 Days ÷ Receivables Turnover The receivables turnover estimates the number of times that a company collects owed cash payments from customers per year, and is calculated as the ratio between the company’s credit sales and its average A/R balance.