What is a Collection Period?

A collection period is the average number of days required to collect receivables from customers. It is measured as the interval from the issuance of an invoice to the receipt of cash from the customer. It is commonly tracked as a measure of the credit and collection efficiency of a business.

A shorter collection period is considered optimal, since the creditor entity has its funds at risk for a shorter period of time, and also needs less working capital to run the business. However, some entities deliberately allow a longer collection period in order to expand their sales to customers having lower credit quality.

The collection period calculation does not include the collection period for non-trade receivables, such as advances to employees, since doing so would skew the result of the calculation.

Example of Collection Period

As an example of a collection period, a business has total annual credit sales of $1,200,000 and average accounts receivable of $200,000. The credit period formula is (Average accounts receivable ÷ Total credit sales) x 365. Based on this formula, the collection period for the business is as follows:

($200,000 Average accounts receivable ÷ $1,200,000 Annual credit sales) x 365 = 60.83 Days

In this example, the collection period is approximately 61 days, meaning it takes the company about two months on average to collect payment from its customers.