What Does Average Collections Period Mean?
The average collections period is a financial metric that calculates the average number of days it takes for a company to collect payments after a sale has been made on credit. This period is a crucial indicator of the efficiency of a company's credit and collections policies, as well as its cash flow management.
What is the Formula for Average Collections Period? How to Calculate Average Collections Period
Below, we’ll dive into the formula for average collections period. To calculate your average collections period, divide your average accounts receivable by your total credit sales. Then, multiply by the number of days.
This formula helps determine how long, on average, it takes for a company to receive payments from its credit sales, typically calculated over an annual period.
What’s the Difference Between Average Collections Period and Days Sales Outstanding (DSO)?
The average collections period and Days Sales Outstanding (DSO) are related but distinct metrics.
Both measure the time it takes for a company to collect payments on credit sales, but DSO is typically calculated for a specific period (like a month or a quarter), providing a snapshot of collection efficiency during that time.
The average collections period, however, often considers an annual perspective, offering a broader view of how long, on average, receivables remain outstanding over a longer period.
