Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Profitability Ratios
- Profitability Ratios Formula
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- 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 the Average Collection period Calculation.
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 do the Average Collection period calculation
- 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 do the Average Collection period calculation. 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 30-35 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 the Average Collection period calculation for the whole year, it wouldn’t be just.
Average Collection Period Calculator
You can use the following Average Collection Period Calculator
|Average Collection Period Formula =||
Average Collection Period Calculation in Excel (with excel Template)
Let us now do the same Average 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
Average Collection Period Video
This has been a guide to Average Collection period formula, its uses, examples and average collection period calculator along with excel templates. You may also have a look at these articles below for further readings