What is an appropriate average payment term?

A reasonable payment term should not exceed the established credit period and also be extended by about a third. For example, with a 30-day net term, around 40 days is usually acceptable at most. As appropriate targets vary from industry to industry, they shouldn't be considered universal values for all companies but rather determined based on your own historical data and relative to similar businesses.

Is the average payment term and collection date of sales the same?

Both measures calculate the average number of days it takes to collect receivables from sales and services. The "accounts receivable turnover days" often referred to as DSO is more commonly used in corporate finance, while the "average collection period" is found more often in accounting. Both measures use average net sales or revenue, total credit sales, and number of days within a period.

How is average turnover of supplies and services calculated?

Add the beginning balance of accounts receivable to the ending balance and divide by two. This smooths out fluctuations during the period. You can use this calculation tool instead. Select the option that is calculated based on the beginning and ending balances.

What is the sales demand-sales rate?

This is the value that results when total credit sales are divided by average sales of goods and services. It is used to calculate how many times receivables were collected within a period. A receivable turnover ratio of 4 means that the receivables were fully paid for four times. Calculated annually, this equates to a payback period of approximately 91 days.

Should you include cash sales?

It is not considered. The average collection period refers only to unpaid amounts that arose from credit sales; therefore the pure credit turnover should be used without including cash sales. If cash sales were included, this would lead to an underestimation of the actual collection period, since these turnovers have already been collected immediately and no receivables have arisen.

Average Collection Period Calculator

Your numbers

Calculation method

From receivables and credit sales

From receivables turnover ratio

Work it out from opening and closing balances

Average the receivables at the start and end of the period instead of typing one figure.

Average accounts receivable

Total credit sales

Length of period

Compare it against my credit terms

Check the collection period against the payment window you offer customers.

Average collection period (days)

days

Average collection period

days

Receivables turnover ratio
Average daily credit sales: $

On average it takes about 91.25 days to collect payment after a credit sale.

How to read this

The average collection period is the average number of days between a credit sale and the payment landing in your account. A lower number means faster cash flow. Turn on the credit-terms comparison to chart it against the payment window you offer.

Average Collection Period is an indicator that shows how many days on average it takes for a company to receive payment after selling on credit. It converts tied up capital into a comprehensible number and shows how fast the money actually arrives in the bank account.

If you enter the average receivables and sales on account or turnover rate of collection, this tool will calculate the collection period and also show the turnover rate and average daily sales on account.

What is the average collection period?

Every time a customer buys goods on credit and pays later, an account receivable is created. Average collection period measures the average length of time that these accounts are outstanding before they are paid. It is also called days' sales in receivables or ratio of average collection period.

This is important because receivables represent money that has been earned but not yet available. The faster the collection of receivables, the sooner this capital can be used for payroll, inventory replenishment and other operating expenses. An increase in days outstanding is an early warning sign that customers are increasingly late with their payments.

Formula for calculating average collection period:

In the direct calculation, average receivables are multiplied by the number of days in a period and then divided by total sales for that period.

\text{ACP} = \frac{\text{Average Accounts Receivable} \times \text{Days in Period}}{\text{Total Credit Sales}}

Average daily turnover lag is usually calculated by adding the opening and closing balances together and dividing by two. The credit sales total only includes sales made on credit. Cash sales are not included as they are received immediately.

Method based on debtor's duration.

You get the same results if you use the receivables turnover ratio which calculates how many times accounts receivable were collected during a given period of time.

\text{Receivables Turnover} = \frac{\text{Total Credit Sales}}{\text{Average Accounts Receivable}}

Dividing the number of days in that period by this factor will give you a new payback time.

\text{ACP} = \frac{\text{Days in Period}}{\text{Receivables Turnover}}

Example task.

Let's say your business had $100,000 in sales last year and an average receivable balance of $25,000. If you use the direct formula, that would give a collection period of about 91 days, if you multiply 365 by 25,000 and then divide it by 100,000.

The same result is obtained by the turnover rate method. Turnover of 100,000 divided by average receivable amount of 25,000 results in a fluctuation of 4. This means that receivables are turned over four times annually. Even if you divide 365 days by 4, the same result of 91 days is obtained. The average turnover per day on an annual basis is about 274, and to collect one customer's receivable, it takes approximately a period equivalent to the turnover of 91 days.

Input	Value
Average accounts receivable	25,000
Total credit sales	100,000
Days in period	365
Receivables turnover ratio	4.0
Average collection period	91.25 days

The results should be interpreted in terms of payment conditions.

The collection period only becomes meaningful when compared to the credit terms you offer. If you give your customers 30 days to pay and the average payment is 28 days, then your policy is working well. If the average is 55 days, it means most of your customers are late with their payments, which ties up capital longer than planned.

It is common practice to keep the collection period within terms of payment and ensure that it does not exceed one-third longer than your terms of payment. For a term of payment of "net 30," the upper limit would be about 40 days. If this upper limit is exceeded, you should investigate which customers are delaying their payments and why.

A faster collection is not always better. If payment terms are too tight, customers may switch to competitors who offer longer payment terms. So the desired length of time for collections should be chosen in such a way that it protects capital while not hampering revenue-generating customer relationships.

What is an appropriate payment term?

There is no one answer to this question. It depends on the industry and the payment terms that are set by the company. Retail companies that accept credit card payments generally have shorter payment deadlines. Construction companies, on the other hand, who invoice in multiple installments can have much longer payment deadlines which may still be within a healthy range. The most useful benchmark is your own historical data and similar sized companies in the same industry.

This tool is for educational and planning purposes only and does not constitute accounting or financial advice. The appropriate goals for your business will depend on the industry, payment terms, and capital requirements. For important decisions, you should review your own financial records and consult with a qualified advisor.

Frequently asked questions

What is an appropriate average payment term?: A reasonable payment term should not exceed the established credit period and also be extended by about a third. For example, with a 30-day net term, around 40 days is usually acceptable at most. As appropriate targets vary from industry to industry, they shouldn't be considered universal values for all companies but rather determined based on your own historical data and relative to similar businesses.
Is the average payment term and collection date of sales the same?: Both measures calculate the average number of days it takes to collect receivables from sales and services. The "accounts receivable turnover days" often referred to as DSO is more commonly used in corporate finance, while the "average collection period" is found more often in accounting. Both measures use average net sales or revenue, total credit sales, and number of days within a period.
How is average turnover of supplies and services calculated?: Add the beginning balance of accounts receivable to the ending balance and divide by two. This smooths out fluctuations during the period. You can use this calculation tool instead. Select the option that is calculated based on the beginning and ending balances.
What is the sales demand-sales rate?: This is the value that results when total credit sales are divided by average sales of goods and services. It is used to calculate how many times receivables were collected within a period. A receivable turnover ratio of 4 means that the receivables were fully paid for four times. Calculated annually, this equates to a payback period of approximately 91 days.
Should you include cash sales?: It is not considered. The average collection period refers only to unpaid amounts that arose from credit sales; therefore the pure credit turnover should be used without including cash sales. If cash sales were included, this would lead to an underestimation of the actual collection period, since these turnovers have already been collected immediately and no receivables have arisen.

Related calculators

Stock Average CalculatorWork out your average cost per share across several stock purchases, with brokerage, profit and loss against a current price, and an average-down target planner.

Payback Period CalculatorCalculate the payback period and discounted payback period of an investment from even or irregular cash flows, with the totals, ROI, schedule, and break-even chart.

Average Variable Cost CalculatorFind average variable cost per unit (AVC = total variable cost divided by output) and solve for any value. Add fixed costs for average total cost and break-even, and see the cost-structure and cost-curve breakdowns.

ADR Calculator (Average Daily Rate)Calculate a hotel's average daily rate from room revenue and rooms sold, or solve backward. Add occupancy, RevPAR, and an ADR index against your comp set.

Sales Tax CalculatorCalculate sales tax, the pre-tax price, the total price, or the tax amount. Enter any two of the four values and the rest fills in, with reverse de-tax and a combined state and local rate builder.

Discount Factor CalculatorFind the discount factor from a rate and a number of periods, discount a future cash flow to present value, solve for the rate or periods, and switch to continuous compounding or a cumulative annuity factor.

Disclaimer: This calculator is provided for general informational and educational purposes only. Our calculators are under active development, and results may be inaccurate, incomplete, or unsuitable for your situation. Always verify the figures independently and seek advice from a qualified professional before relying on them. We make no warranties and accept no liability for any loss or decision arising from use of this tool.

References

Investopedia: Average Collection Period
Definition of the average collection period, its formula, and how it relates to receivables turnover.
Investopedia: Days Sales Outstanding (DSO)
The corporate-finance view of the same metric, including interpretation and benchmarks.
Corporate Finance Institute: Accounts Receivable Turnover Ratio
How the receivables turnover ratio is built and used alongside the collection period.