This average collection period calculator estimates the average number of days it takes the company to collect its receivables within a fiscal year. There in in depth information on how this indicator is computed below the form.
How does this average collection period calculator work?
This accounting form helps in evaluating the efficiency in selling the receivables of a company by taking into consideration the following figures:
Yearly sales on credit;
Initial and Final receivables balance.
The algorithm behind this average collection period calculator applies these formulas, while displaying the results presented below:
- Average collection period = 365 / Receivables turnover ratio
Receivables turnover ratio = Yearly sales on credit / [(Initial receivables balance + Final receivables balance)/2]
Total value of the receivables collected within one fiscal year = Initial receivables balance + Yearly sales on credit – Final receivables balance
The interpretation of the average collection period
- If the average collection period expressed in days is low (usually considered to be less than 60 days. In some cases less than 90 days or even 30 days) one of the following hypotesis confirms:
- either the company sells its goods on cash which is a positive sign;
- or that its receivable collection strategy is efficient.
If the average collection period is high (by comparison with a goal) it may demonstrate that the busines is inneficient in collecting its receivables.
Example of a result
A company registered within this fiscal year a value of sales on credit of $100,000, an initial receivables balance of $10,000 and a final receivables balance of $37,000. This will result in these figures:
■ Average collection period: 86 days
■ Receivables turnover ratio: 4.26
■ Total value of the receivables collected in one fiscal year: $73,000.0018 Feb, 2015