Average Collection Period interpretation
Average Collection Period represents the average number of days it takes the company to convert receivables into cash. Average Collection Period formula is:
Average collection period measures the average number of days that accounts receivable are outstanding. This activity ratio should be the same or lower than the company's credit terms.
As a rule, outstanding receivables should not exceed credit terms by more than 10-15 days.
If you allow various types of credit transactions, then the average collection period MUST be also calculated separately for each category.
This ratio takes in consideration ONLY the credit sales. If the cash sales are included, the ratio will be affected and may lose its significance. It is best to use average accounts receivable to avoid seasonality effects. If the company uses discounts, those discounts must be taken into consideration when calculate net accounts receivable.
Average Collection Period is figured as days. A popular variant of this ratio is to convert it into receivables turnover ratio in terms of "turnover times".
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