What is the average collection period?

The average payment period can be used to compare various companies against each other as well as the industry average. The average payment period needs to be compared to other companies in the same industry as typically, there will be a standard how to calculate average payment period average. The average payment period is arrived at by dividing Credit Purchases by 365 days, and then dividing the result into Average Accounts Payable. Thus, it would make more than 10% on its money reinvesting in new inventory sooner.

• The company has great sales forecasts, so the management team is trying to formulate a lean plan to retain the most profit from sales.
• Make things easy by connecting with your customers using an intuitive, cloud-based collaborative payment portal that empowers them to pay when and how they want.
• Average collection period refers to the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable .
• This includes any discounts awarded to customers, product recalls or returns, or items re-issued under warranty.

Enforce strict payment terms and communicate the same with your current and future customers. Look at the average collection period analysis and reduce the collection time. The average collection period for account receivables can help you with future financial planning. Here is how the calculation of average collection period plays a role in your accounts receivable.

Formula for Calculating the Average Collection Period

A low average collection period indicates that an organization collects payments faster. Managers may try to make payments promptly to avail the discount offered by suppliers. Where a discount is offered for early payments, the benefit of discount should be compared with the benefit of the total credit period allowed by suppliers. Evidently, analysts and investors find this ratio useful – the goal is to determine whether the firm is financially capable of making the payments. It isn’t of utmost importance if it accomplishes this at the fastest rate possible. Therefore it is important for companies to pay attention to the discounts that vendors might be offering.

At the basic level, it only tells the average length of time it takes for a company to pay back its vendors. Additionally, it can help them look for discounts available when they choose to pay vendors sooner rather than later. In short, payment period is a sensor for how efficiently a company utilizes credit options available to cover short-term needs. As long as it is in line with the average payment period for similar companies, this measurement should not be expected to change much over time. Any changes to this number should be evaluated further to see what effects it has on cash flows. Inventory conversion period + average collection period – average payment period.

The Accounting University with 3400+ Accounting contents as study material which can watch, read and learn anyone, anywhere.

When you know the current balance of your account, you can schedule and plan your future expenses accordingly. While seeking payments and retaining customers, one can easily miss out on timings. The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.

This is especially true for businesses who are reliant on receivables in respect to maintaining cash flow. Efficient management of this metric is necessary for businesses needing ample cash to fulfill their obligations. Average collection period is the number of days it takes to receive payment for goods or services. This metric determines short-term liquidity, which is how able your business is to pay its liabilities.

Benefits of Calculating Your Average Collection Period

With this approach, you can better prevent accounts becoming delinquent. With an accounts receivable automation solution, you can automate tedious, time-consuming manual tasks within your AR workflow. For instance, with Versapay you can automatically send invoices once they’re generated in your ERP, getting them in your customers’ hands sooner and reducing the likelihood of invoice errors.

If the industry has an average payment period of 90 days also, for Clothing, Inc., sticking with this plan makes sense. During the accounting year 2018, Company A ltd, made the total credit purchases worth $ 1,000,000. For the accounting year 2018, the beginning balance of the accounts payable of the company was $350,000, and the ending balance of the accounts payable of the company was $390,000. Using the information, calculate the Average Payment period of the company. The average collection period is the average number of days between 1) the dates that credit sales were made, and 2) the dates that the money was received/collected from the customers. The average collection period is also referred to as the days’ sales in accounts receivable.