Average collection period is the time a company takes to collect from its credit customers. It is similar to the concept of days’ sales outstanding. The average collection period takes into account the accounts receivable turn over that is the number of times a business sells its products in a year. The higher the accounts receivable turn over the lower the average collection period.
Average collection period = (Average Accounts receivable / Credit sales) * 360
Assume a business has average accounts receivable balance of $500,000 and credit sales of $5,000,000. The average collection period will be
Average collection period = ($500,000 / $5,000,000) * 360 = 36 days
It means that the business collects all its credit sales every 36 days or 10 times in a year.
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