Average Collection Period

Calculation

Average collection period is calculated by dividing 365 days by accounts receivable turnover.

Interpretation

A company’s average collection period is a liquidity ratio that describes how long it takes the company to collect their accounts receivable (an asset account on the balance sheet).

A lower average collection period means the company is faster and therefore more efficient at collecting the cash it is owed.

A speedy collection of accounts receivable is desired, since the company can then employ the cash in ways that are more productive than simply waiting for the cash to be collected.