Average collection period ratio
The average collection period ratio measures the average number of days clients take to pay their bills, indicating the effectiveness of the business’s credit and collection policies. This ratio also determines if the credit terms are realistic. It is calculated by dividing receivables by total sales and multiplying the product by 365 (days in the period).
To determine whether or not your average collection period results are good, simply compare your average against the credit terms you offer your clients. If your company allows your clients credit terms of 30 days, and your average collection period is 45 days, that is troublesome. However, if your average collection period is less than 30 days, that is favourable.
Calculate and compare the average collection period ratio
(days in the period) * (average accounts receivable)
net credit sales