For Accounts Receivable (AR) Managers, understanding how quickly your company collects payments is essential for maintaining cash flow and financial stability. One of the most useful metrics for this is the average collection period(ACP), which measures the number of days it takes for a business to convert its receivables into cash.
This guide will walk you through the average collection period formula, how to calculate it step by step, and ways to improve your collections strategy for a healthier cash flow.
What is the average collection period?
The average collection period is the time it takes, on average, for a company to collect payments from customers. A shorter collection period indicates that customers are paying quickly, while a longer period suggests delays that could affect cash flow and financial planning.
This metric is particularly important for AR managers because it helps:
- Assess how efficiently the company collects payments
- Identify potential cash flow bottlenecks
- Determine if credit policies need adjustments
- Benchmark performance against industry standards
How to calculate the average collection period
The formula for the average collection period is:
Average Collection Period = (Average Accounts Receivable / Net Credit Sales) × 365
Where:
- Average Accounts Receivable = (Beginning AR + Ending AR) / 2
- Net Credit Sales = Total credit sales in a given period (excluding cash sales)
Step-by-step example
Let’s assume a company has the following financial data:
- Beginning AR: $50,000
- Ending AR: $70,000
- Net Credit Sales for the year: $600,000
Step 1: Calculate average accounts receivable
Average AR = ($50,000 + $70,000) / 2 = $60,000
Step 2: Divide average AR by net credit sales
$60,000 / $600,000 = 0.10
Step 3: Multiply by 365 to determine ACP
0.10 × 365 = 36.5 days
This means the company takes an average of 36.5 days to collect payments from customers.
Industry benchmarks and what they mean
The average collection period varies by industry. Here are some general benchmarks:
- Manufacturing: 45-60 days
- SaaS and Subscription Services: 30-45 days
- Retail: 20-40 days
- Healthcare: 40-55 days
*These figures are supported by data from Clearly Payments.
Businesses should compare their ACP against industry standards to ensure they remain competitive. If your ACP is significantly higher than your industry’s average, it may be a sign of inefficient AR management.
The impact of a high ACP on business operations
A high ACP can cause significant financial strain, leading to:
- Cash flow problems – Slow collections mean less working capital available for daily operations.
- Increased borrowing needs – Businesses may need to rely on credit lines to cover expenses.
- Higher risk of bad debt – The longer an invoice remains unpaid, the more likely it is to go delinquent.
- Strained customer relationships – Frequent follow-ups on overdue invoices may damage client relationships.
Common mistakes AR teams make when calculating ACP
To ensure accuracy, AR teams should avoid these common errors:
- Including cash sales in net credit sales – ACP should only consider sales made on credit.
- Ignoring seasonal fluctuations – Businesses with seasonal demand should analyze ACP based on multiple timeframes.
- Not updating data regularly – Using outdated AR or sales figures can lead to misleading calculations.
- Failure to account for write-offs – Bad debts should be factored into AR calculations to get a realistic picture.
Technology’s role in improving ACP
Automation and AI-driven insights can help businesses optimize their collection periods. Here’s how:
- Automated invoicing and reminders – Reduces the risk of late payments by ensuring invoices are sent promptly.
- AI-driven payment predictions – Helps AR managers identify at-risk accounts and prioritize collections efforts.
- Integrated payment processing – Enables faster and more convenient payment options for customers.
By leveraging automation, businesses can improve their ACP, enhance cash flow, and reduce financial risk.
How to improve your average collection period
Quick checklist: assess your AR health
To ensure your accounts receivable process is optimized, use this checklist:
– Is your average collection period within industry benchmarks?
– Do you send invoices immediately after delivering goods/services?
– Are you using automated invoicing and payment reminders?
– Do you offer multiple payment options for customers?
– Have you reviewed your credit policies in the past six months?
– Are you tracking customer payment behavior to identify risks?
– Do you have a strategy for handling overdue invoices effectively?
– Are you leveraging AR automation to reduce manual processes?
If you didn’t check the box on all of these items, it might be time to refine your AR processes to improve collections and optimize cash flow.
If your ACP is longer than desired, consider these strategies:
1. Optimize invoicing processes
- Send invoices immediately after goods or services are delivered.
- Use automated invoicing to reduce manual errors and delays.
2. Strengthen collections efforts
- Set up automated reminders for upcoming and overdue invoices.
- Offer discounts for early payments to encourage faster collections.
3. Review credit policies
- Tighten credit approval processes to minimize risk.
- Require upfront deposits or partial payments from high-risk customers.
4. Provide multiple payment options
- Make it easy for customers to pay via ACH, credit card, or self-service portals.
5. Leverage analytics for proactive collections
- Use AI-driven insights to predict payment trends and take preventive actions.
- Implement cash application automation to speed up payment matching and reconciliation.
Conclusion: Make ACP a key part of your AR strategy
Understanding and optimizing your average collection period is essential for maintaining healthy cash flow and improving financial stability. By leveraging automation through Alevate AR, you can track ACP effortlessly, enhance collections efficiency, and make data-driven decisions that strengthen your company’s financial position.
Bookmark this guide for future reference and share it with your finance team—it’s time to take control of your receivables and optimize your cash flow!
