![]() Using those assumptions, we can now calculate the average collection period by dividing A/R by the net credit sales in the corresponding period and multiplying by 365 days. If the average A/R balances were used instead, we would require more historical data. We’ll use the ending A/R balance for our calculations here and assume the number of days in the period is 365 days. In 2020, the company’s ending accounts receivable (A/R) balance was $20k, which grew to $24k in the subsequent year. Suppose a company generated $280k and $360k in net credit sales for the fiscal years ending 20, respectively. Average Collection Period Example Calculation The formula for calculating the average collection period is as follows. More specifically, the company’s credit sales should be used, but such specific information is not usually readily available. In order to calculate the average collection period, the company’s accounts receivable (A/R) carrying values from its balance sheet are needed along with its revenue in the corresponding period. More Accounts Receivable Outstanding → Less Short-Term Liquidity.Less Accounts Receivable Outstanding → More Short-Term Liquidity.Therefore, the working capital metric is considered to be a measure of liquidity risk. “How many days does it require a company to receive its owed cash payment from credit purchases?”.In short, the average collection period answers the question: If a company is incapable of quickly obtaining cash from customers for goods/services already delivered (and “earned”), the company might need to implement changes to its policies to counteract the time lag between delivery and cash receipt. ![]() Thus, the average collection period signals the effectiveness of a company’s current credit policies and A/R collection practices. Longer Collection Period → Inefficient A/R Collection Process.Shorter Collection Period → Efficient A/R Collection Process.Since the collection period refers to the number of days it takes a company on average to collect cash from credit purchases, companies strive to reduce the time needed as they mature to increase their near-term liquidity. an “IOU” from customers who paid using credit as opposed to cash upfront. On the balance sheet, the accounts receivable (A/R) line item is a current asset that captures the value of owed payments from customers to a company for products and/or services already delivered, i.e. ![]() The average collection period measures a company’s efficiency at converting its outstanding accounts receivable (A/R) into cash on hand. How to Calculate Average Collection Period The Average Collection Period represents the number of days that a company needs to collect cash payments from customers that paid on credit.
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