It is also called the collection period or the receivables collection period, and in the UK the same ratio usually goes by debtor days. Because it is worked out from a full year of figures in the annual accounts, it often appears in ratio analysis and in comparisons between years.
Average collection period formula
Average collection period = average accounts receivable ÷ net credit sales × 365
Average accounts receivable is usually the opening balance plus the closing balance, divided by 2. Net credit sales are sales on credit minus returns, allowances and discounts. For a quarter or a month, use that period's credit sales and its number of days.
If you already know the accounts receivable turnover ratio, divide 365 by it. The result is the same, because the turnover ratio uses the same two figures the other way round.
How to calculate the average collection period
Example. A wholesaler sells to trade customers on 30-day terms. Last year its net credit sales were $9,125,000, or $25,000 a day, and receivables rose from $1,050,000 at the start of the year to $1,250,000 at the end. All figures are illustrative.
- Average receivables are ($1,050,000 + $1,250,000) ÷ 2 = $1,150,000.
- The average collection period is $1,150,000 ÷ $9,125,000 × 365 = 46 days.
- Through the turnover ratio, $9,125,000 ÷ $1,150,000 = 7.93 times, and 365 ÷ 7.93 = 46 days.
On 30-day terms, 46 days means customers take about 16 days longer than agreed, on average. The figure is an average, so it says nothing yet about which customers cause the gap.
Average collection period vs DSO
Both measure how many days of credit sales are tied up in receivables, and with the same inputs they give the same answer. The difference lies in which balance and which sales you use. The average collection period usually takes an average balance and a full year of sales, while days sales outstanding (DSO) usually takes the latest month-end balance and is tracked month by month.
| Input or use | Average collection period | DSO |
|---|---|---|
| Receivables | Average of the opening and closing balance | Balance at the end of the month or quarter |
| Sales | Net credit sales for the year | Credit sales for the latest month, quarter or year |
| How often | Once a year, from the annual accounts | Every month |
| Typical use | Comparing years and companies | Managing collections |
Usage varies, so check the inputs before you compare two figures. HMRC's Enquiry Manual, for example, works out the average collection period from closing debtors, the same calculation as period-end DSO. When receivables grow during the year, an average balance gives a lower figure. For the wholesaler, period-end DSO is $1,250,000 ÷ $25,000 = 50 days, against an average collection period of 46 days.
How to read the average collection period
Compare the result with your payment terms. On 30-day terms, every day above 30 is a day customers take beyond what they agreed, on average. Track the figure across years and look into any jump before you read it as a collections problem, because longer terms for a large customer raise it too.
A company-wide figure also hides who is slow, so work it out per customer with each customer's average balance and credit sales. One of the wholesaler's customers bought $730,000 on credit during the year with an average balance of $60,000, which gives $60,000 ÷ $730,000 × 365 = 30 days. Another bought $365,000 with an average balance of $75,000, which gives $75,000 ÷ $365,000 × 365 = 75 days, about 45 days past terms.
Seasonal businesses need one more adjustment. If receivables peak in the middle of the year, the average of the opening and closing balance misses the peak, so use the average of the twelve month-end balances instead.
Sunbay works on the receivables behind the figure. It connects to your ERP or accounting system, sends reminders by email and SMS before and after the due date, makes AI voice calls on invoices that stay unpaid and matches incoming payments using ERP data, so paid invoices do not stay in receivables. Its analytics view shows DSO and receivables aging for each customer, the monthly detail an annual collection period leaves out.
Frequently asked questions
Is the average collection period the same as DSO?
It is the same ratio, used in different ways. The average collection period usually uses average receivables and a year of sales from the annual accounts, while DSO usually uses the month-end balance and is tracked monthly, so the two can differ for the same company.
What is a good average collection period?
There is no universal benchmark, because it depends on your terms and your industry. Compare it with your standard payment terms. On net 30, a collection period of 33 days means customers pay about three days late on average.
How do you calculate the average collection period from the turnover ratio?
Divide 365 by the accounts receivable turnover ratio. A turnover of 7.93 times a year gives 365 ÷ 7.93 = 46 days.
What is the difference between the average collection period and the average payment period?
The average collection period measures how long customers take to pay you. The average payment period measures how long you take to pay suppliers, using accounts payable and purchases. Both feed into the cash conversion cycle.
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