Want to improve your DSO? Download this eBook to understand how to enhance your collections process with automation Download Now Why Calculating Your Collection Period Is Important The second equation divides 365 days by your accounts receivable turnover ratio.ģ65 ÷ A/R turnover = average collection periodģ65 ÷ (net credit sales ÷ average A/R balance) = average collection periodĮxample: 365 ÷ ($800,000 ÷ $50,000) = 22.8 days average collection periodīoth equations will produce the same average collection period figure if you have the appropriate data. ![]() (A/R balance ÷ total net sales) x 365 = average collection periodĮxample: ($50,000 ÷ $800,000) x 365 = 22.8 days average collection periodĢ. The first equation multiplies 365 days by your accounts receivable balance divided by total net sales. There are two A/R collection period formulas you can use for calculating your average collection period:ġ. This is also called your “A/R turnover ratio.” You can determine net profits by comparing net credit sales during the period (most often a year or 6 months) and your average accounts receivable balance during the period. This figure is best calculated by dividing a yearly A/R balance by the net profits for the same period of time. Typically, the average accounts receivable collection period is calculated in days to collect. How to Calculate Your A/R Collection Period Measuring this performance metric also provides insights into how efficiently your accounts receivable department is operating. ![]() You can understand how much cash flow is pending or readily available by monitoring your average collection period. Your collection period tells you how long it takes after a credit sale to receive payment. What Is an Accounts Receivable Collection Period?īusinesses often sell their products or services on credit, expecting to receive payment at a later date. It’s smart to know how to calculate your collection period, understand what it means, and how to assess the data so you can improve accounts receivable efficiency. Your average A/R collection period is an important key performance metric (KPM). ![]() Other common names include “days sales in accounts receivable,” “average receivables collection period,” or “ days sales outstanding (DSO).” Once an invoice hits accounts receivable (A/R), it enters what’s called the collection period. Net income and sales operate on a delayed schedule, and companies crunch the numbers expecting to settle invoices and get paid sometime in the future. Businesses often rely on cash flow that they haven’t yet received.
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