Formula to calculate (average) collection period:
Collection Period = Accounts Receivable X 365 days
Collection Period = 365 days
Accounts Receivable Turnover Ratio
The average collection period calculation uses the average accounts receivable over the sales period.
(Average) Collection Period definition and explanation:
The collection period or average collection period must be compared to competitors to see whether the credit given, and customer risk, is in line with the industry.
A high collection period shows a high cost in extending credit to customers.
The collection period is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.