Average Collection Period Formula (Table of Contents)
 Average Collection Period Formula
 Average Collection Period Calculator
 Average Collection Period Excel Template
Average Collection Period Formula
As the name suggests, the collection period is the time between the credit sales are made and the cash is paid.
Here’s the formula for average collection period –
Alternatively, collection period can also be calculated as –
Average Collection Period Formula Example
Now we will take a practical example to illustrate how we should calculate the average collection period.
BIG Company decides to increase its credit term. The top management of the company requests the accountant to find out the collection period of the company in current scenario.
Here is the information available to the accountant –
 Net Credit Sales for the year – $150,000
 Accounts Receivables at the beginning of the year – $20,000
 Accounts Receivables at the end of the year – $30,000
 As an accountant, find out the collection period of BIG Company.
In this example, first, we need to calculate the average accounts receivable.
 The beginning and ending accounts receivables are $20,000 and $30,000 respectively.
 The average accounts receivables for the year would be = ($20,000 + $30,000) / 2 = $50,000 / 2 = $25,000.
Now, we will find out the accounts receivables turnover ratio.
 Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
 Or, Accounts Receivable Turnover Ratio = $150,000 / $25,000 = 6.0x
Now, we can calculate the collection period.
 Collection Period = 365 / Accounts Receivable Turnover Ratio
 Or, Collection Period= 365 / 6 = 61 days (approx.)
BIG Company now can change its credit term depending on its collection period.
Explanation of Average Collection Period Formula
The first formula is widely used by investors. The second formula is used when one doesn’t want to use the first formula.
In the first formula, we first need to find out the accounts receivable turnover ratio.
The formula for accounts receivable turnover ratio is –
Once we know the accounts receivable turnover ratio, we would be able to calculate the collection period. All we need to do is to divide 365 by the accounts receivable turnover ratio.
In the second formula, all we need to do is find out the average accounts receivable per day (meaning average accounts receivable divided by 365) and also the average credit sales per day (meaning average credit sales divided by 365).
Use of Collection Period
Since company needs to decide how much credit term it should provide, it needs to know its collection period.
For example, if a company has a collection period of 40 days, it should provide the term as 3035 days.
Knowing the collection period is very useful for any company.
There are two reasons for this –
 First, a huge percentage of company’s cash flow depends on the collection period.
 Second, knowing the collection period beforehand helps a company decide means to collect the money that is due on the market.
Collection period may differ from company to company. A company may sell seasonally. In that case, the formula for average collection period should be adjusted as per the necessity.
If for seasonal revenue, the company decides to calculate the collection period for the whole year, it wouldn’t be just.
Average Collection Period Calculator
You can use the following Average Collection Period Calculator
365 Days  
Accounts Receivable Turnover Ratio  
Average Collection Period Formula =  
Average Collection Period Formula = 


Average Collection Period Calculation in Excel (with excel Template)
Let us now do the same collection period calculation example above in Excel.
This is very simple. You need to calculate the average accounts receivable, find out the accounts receivables turnover ratio. And then find the collection period.
First, we need to calculate the average accounts receivable
Now, we will find out the accounts receivables turnover ratio.
Now, we can calculate the collection period.
You can download this Average Collection Period Excel template here – Average Collection Period Excel Template
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