Average collection period (receivables turnover)

It is one of six main calculations used to determine short-term liquidity, that is, the ability of a company to pay its bills (current liabilities) as they come due.

The formula for calculating average collection period is:

Average collection period = (accounts receivable / sales) x number of days in a year

A shorter average collection period (60 days or less) is generally preferable and means a business has higher liquidity.

Average collection period is also used to calculate another liquidity measure, the receivables turnover ratio.

More about the average collection period

Accounts receivable appear on a company’s balance sheet while sales appear on the income statement. Let’s say that ABC Co. has annual sales of $400,000 and accounts receivable of $55,000, its average collection period would be calculated as follows:

($55,000 / $400,000) x 365 days = 50 days

In this example, ABC Co. keeps its accounts receivable up to date.