Average collection period refers to the amount of time it takes your business to receive payments from clients. It’s a metric commonly used to get a snapshot of cash flow on hand and how effective the company’s collection process is overall.
Let’s review why this metric is important, how to calculate average collection period, and how modern tools like automation can take the hard parts off your shoulders.
How To Calculate Average Collection Period
The average collection period offers a snapshot of accounts receivable (A/R) collection efficiency. Therefore, it indicates how much capital your company has available to fulfill its financial obligations. This applies to ongoing expenses like salaries, but it also applies to a longer-term financial strategy and positioning that sets your company up for success.
Naturally, it’s a crucial metric to track for growing businesses that need stable, predictable income to fund service expansions and other growth opportunities.
Calculate your average collection period with this easy formula:
(days in the period) x (average accounts receivable) ÷ net credit sales = average collection period
The collection period formula itself is simple to calculate, but note that the figure, on its own, won’t do your company much good. The average collection period is a comparative metric holding more value when you get a sense of where you stand relative to others.
These types of metrics vary greatly across industries. You can get more specific insights by tracking your average collection period over time and using it as a benchmark for industry trends.
In most cases, companies with a similar size or scope as yours will produce similar metrics. So, start getting data now and build a history for further assessments down the line.
Want to improve your DSO?
Download this eBook to understand how to enhance your collections process with automationDownload Now
The Role of Automated Accounts Receivable Solutions
With the right tools, you can use A/R collections automation to optimize your average collection period. It comes down to leveraging tools that streamline collections from planning to execution. Doing so improves liquid cash flow, improves days sales outstanding (DSO) rates, and can even reduce payment delinquency.
For example, online customer portals give clients an easy way to make payments and review their account details on their own. A real-time dashboard enables the collections team to stay on-top of all their clients. The idea is to make things easy for both you and your clients. If you give them the tools to automate payments, you’ll likely find fewer clients will struggle with the process.
Research into A/R efficiency shows by leveraging automation, companies experience a 23% improvement in prioritizing collections compared with those that still rely on manual methods.
Automated accounts receivable collections solutions also make it easier to get a handle on key A/R metrics with user-friendly dashboards and custom reporting tools. Rather than running reports by hand, companies can enable flexible tools to generate these reports on nearly any schedule that makes sense for the business:
- A/R aging reports
- Cash forecasting
- Collection effectiveness indexes
- DSO trends
- Payment histories
Manage Average Collection Periods More Effectively
Given that “average collection period” is a broad A/R metric, improving it requires companies to take a long look at their current processes and, when necessary, implement new tools to shore up their weak points. It’s about getting more insight into your A/R collection period and giving your clients – and your employees – digital tools that make payment processing easy.
Gaviti solutions were designed specifically for this purpose; acting as all-in-one platforms for automated A/R collections management. If you’re struggling to get a handle on key collection metrics, visit our site. Book a demo to get a practical look at what automation can do for your business.