Average Collection Period
The average collection period (ACP) is a key performance indicator used in accounts receivable management to measure the average number of days it takes for a company to collect payment from its customers. It is calculated by dividing accounts receivable turnover by accounts receivable balance and multiplying the result by the number of days in the accounting period.
Formula for Average Collection Period (ACP):
ACP = (Accounts Receivable Turnover / Accounts Receivable Balance) x Number of Days in Accounting Period
Accounts Receivable Turnover:Accounts receivable turnover is the total amount of cash collected from customers in a particular period, divided by the average accounts receivable balance for the same period.
Accounts Receivable Balance:Accounts receivable balance is the total amount of money that customers owe to the company for goods or services provided.
Number of Days in Accounting Period:The number of days in the accounting period is the number of days for which the company has been billing customers during the period.
Interpretation:
The average collection period provides valuable insights into a company’s credit collection efficiency. A low ACP indicates that customers are paying their debts quickly, while a high ACP indicates that customers are taking longer to pay. Companies should strive to keep their ACP as low as possible to improve cash flow and reduce bad debt.
Factors Affecting ACP:
- Industry type
- Customer demographics
- Payment terms
- Economic conditions
- Inventory management
- Sales cycle length
Best Practices for Managing ACP:
- Implement clear payment policies and enforcement mechanisms.
- Offer multiple payment options to customers.
- Provide prompt and efficient customer service.
- Track and monitor accounts receivable aging reports regularly.
- Implement collection procedures to expedite payment.
Note:
The average collection period is a lagging indicator, meaning that it reflects payments received in the past, not payments due in the future. Therefore, it is important to supplement ACP with other metrics such as accounts receivable aging reports to gain a more comprehensive understanding of the company’s cash flow position.
