What is the average collection period?
It is the average number of days a business takes to collect payment after making a credit sale, calculated as (accounts receivable / total credit sales) multiplied by the number of days in the period.
What is a good average collection period?
A good value is generally one that is close to or shorter than your stated payment terms; for example, if you offer net-30 terms, collecting in 30-45 days is typically considered healthy.
Why is a shorter collection period better?
A shorter collection period means cash comes in faster, improving cash flow and reducing the risk of bad debts, while a longer period can signal collection problems or overly lenient credit policies.
Is average collection period the same as days sales outstanding?
Yes, average collection period and days sales outstanding (DSO) measure the same thing: the typical number of days it takes to convert credit sales into cash.
Can the average collection period be too low?
Yes, an unusually low number can mean credit terms are too strict, which may turn away customers who need flexible payment options and limit sales growth.