Average Collection Period Calculator
This average collection period calculator determines the average number of days it takes for a company to collect payments from its customers after a sale has been made on credit.
Consider a small electronics store that sells laptops and smartphones on credit. The store owner wishes to find out how long it typically takes for customers to settle their bills. By employing the calculator, they can input their average accounts receivable and net credit sales for a specified period. Suppose the store has average accounts receivable of $50,000 and annual credit sales of $300,000. The calculator would show that it takes an average of 60 days for customers to pay their bills. This information empowers the store owner to make informed decisions regarding credit policies and cash flow management.Average Collection Period Chart
| Company | Industry | Average Accounts Receivable | Annual Credit Sales | Average Collection Period (Days) |
|---|---|---|---|---|
| TechGadgets Inc. | Electronics | $750,000 | $4,500,000 | 60 |
| FreshFoods Ltd. | Grocery | $250,000 | $3,000,000 | 30 |
| LuxeCars Auto | Automotive | $2,000,000 | $8,000,000 | 90 |
| QuickFix Plumbing | Services | $100,000 | $600,000 | 61 |
| GreenEnergy Co. | Utilities | $1,500,000 | $9,000,000 | 61 |
Average Collection Period Formula
The Average Collection Period Formula is:
Average Collection Period = (Average Accounts Receivable / Annual Credit Sales) × 365Imagine MegaTech Solutions, a software company, has average accounts receivable of $500,000 and annual credit sales of $3,000,000. To calculate their average collection period:
- Average Collection Period = ($500,000 / $3,000,000) × 365
- = 0.1667 × 365
- = 60.8 days
This indicates that it takes MegaTech Solutions approximately 61 days on average to collect payments from their customers after making a sale on credit.
How to calculate average collection period?
Calculating the average collection period involves several straightforward steps:
Figure the average accounts receivable: Add the beginning and ending accounts receivable for the period and divide by 2.
Calculate the annual credit sales: Sum all credit sales for the year.
Apply the formula: Divide average accounts receivable by annual credit sales and multiply by 365.
Let’s use HealthTech Innovations, a medical equipment supplier, as an example:
- Beginning accounts receivable: $400,000
- Ending accounts receivable: $600,000
- Annual credit sales: $5,000,000
Step 1: Average accounts receivable = ($400,000 + $600,000) / 2 = $500,000
Step 2: Annual credit sales = $5,000,000
Step 3: Average Collection Period = ($500,000 / $5,000,000) × 365 = 36.5 days
Thus, HealthTech Innovations’ average collection period is approximately 37 days.