Calculate Average Collection Period
The average collections period (ACP) shows you how many days, on average, it takes to collect your bills. The lag time between a credit sale and the collection of cash has important implications for cash flow. Cash that you expect to receive isn't available to meet current obligations until you actually receive it. The longer it takes to collect on open accounts, the more expected income is outstanding. This has an adverse impact on cash flow.
Example: Jennifer Merrill manufactures and sells toys. She made sales to three stores in the last month, for $10,000, $12,000, and $7,000 each. She expects to receive checks from these stores sometime in the next two to three weeks. This week, the bills for toy materials, payroll, and rent are due. Although Jennifer is expecting the money to pay these bills very soon, she does not have cash on hand to pay them today. She must either wait to collect on her credit sales, or borrow money to pay her bills on time.
The average collection period is a good measure of how effectively you extend credit, monitor your accounts, and pursue collections. You should check it regularly, ensuring that it roughly aligns with the terms you offer. For instance, if you give your customers 30 days to pay, your average collections period should be just about 30 days. If the ACP exceeds your credit terms, or if it is rising over time, you may need to tighten your credit policy or collections strategy.
Calculate your average collection period
The ACP calculation can be done each quarter or annually. Usually, the prior year's sales made on credit will yield results accurate enough to manage credit effectively. More recent data may give you more precise results, particularly if your income undergoes large fluctuations from year to year.
Calculate collection periods by entering credit terms, annual or quarterly sales made on credit, and your current A/R balance below. You can also estimate these numbers to see how different scenarios change your ACP.
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