• Average collection period refers to the length of time it takes a business to collect receivables.

  • Companies calculate the average collection period to make sure they have enough cash to meet their financial obligations.
  • The average collection period is determined by dividing the average AR balance by the total amount of net sales on credit and multiplying this figure by the number of days in the period.
  • This period testifies to the effectiveness of the company’s AR management methods.
  • A low average collection period indicates that the organization is collecting payments faster.