Businesses must be able to manage their average collection period to operate smoothly. The average collection period ratio is closely related to your accounts receivable turnover ratio. While the turnover ratio tells you how often you collect your accounts, the collection period ratio tells you how long it takes you to collect accounts. There are plenty of metrics to choose from, of course, so you must select those you measure wisely. A small used car lot offers to finance cars to customers who cannot pay up front.

There are automated software that streamlines invoicing sending process. When customers take their steps to make payments, waiting for processing time to end is not good for both. Accounts receivable in line with this process and strategically manage both payment sections. Receiving early payments is essential to plan your financial forecasts the right way and adhere to budgets accurately.

How Can a Company Improve its Average Collection Period?

It is slightly high when you consider that most companies try to collect payments within 30 days. The monitoring of the average collection period is one way to track a company’s ability to collect its accounts receivable. By comparing with https://kelleysbookkeeping.com/ the industry standard, a company can understand whether its DSO is acceptable, or can be improved. At the same time, the company’s past performance gives an idea of whether the collection process of a business is improving over time.

You can calculate the average accounts receivable over the period by totaling the accounts receivable at the beginning of the period and the end of the period, then divide that by 2. To Average Collection Period Definition address your average collection period, you first need a reliable source of data. When you log in to Versapay, you get a clear dashboard of the current status of all your receivables.

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Most businesses would aim for a lower average collection period due to the fact that most companies collect payments within 30 days. These options are easy to implement and can help you manage customer payments more effectively, reducing your accounts receivable collection period. As you might have noticed from the formula above, in order to work out your average collection period, you need to know your average accounts receivable balance.

• Here are the ways to shorten the collection period without losing customers.
• End-to-end Financial Close Automation to enable day-zero close with close task and project templates, automated workflow and close task management.
• Accounts receivable in line with this process and strategically manage both payment sections.
• In a business with consistent sales and a stable customer mix, the average collection period should be fairly consistent from month to month.
• Net credit sales are simply the total of all credit sales minus total returns for the period in question.
• Until cash has been collected, a company is yet to reap the full benefit of the transaction.
• It means that your clients take a shorter period of time to pay their bills and you have less uncertainty about payment times.

The average collection period is an important metric for keeping your cash flow strong and ensuring your collection policies are effective. In general, a higher receivable turnover is better because it means customers pay their invoices on time. So Light Up Electric should compare its AR Turnover Ratio to the industry average to see how they’re doing.