Then, retrieve the accounts receivable balances from the balance sheet at the start and end of that period to calculate the average. A significant increase in the average collection period might indicate lenient credit policies or potential collection issues, whereas a decreasing trend could signify improved efficiency or stricter credit checks.
Average Collection Period Calculation Using Net Credit Sales
Context is essential for deriving meaningful insights from the calculation. Next, locate the net credit sales figure from the income statement, ensuring that cash sales are excluded to maintain accuracy.
The "average accounts receivable" is typically calculated by taking the beginning and ending receivable balances for the period and dividing by two. Benchmarking and Comparison One of the most powerful uses of the average collection period is benchmarking.
Average Collection Period Calculation Using Net Credit Sales
The resulting number is a pure ratio that is then scaled to a daily basis for practical interpretation. This metric, often expressed in days, reveals the average length of time it takes for a business to receive payments after a sale has been made on credit.
More About How to calculate average collection period
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