An organization’s average collection period is the average number of days it takes to collect and turn its accounts receivable into cash. It is one of the six key formulas used to calculate short-term liquidity, or a company’s capacity to fulfill its obligations (current liabilities) as they become due.
Average collection period is calculated using the following formula:
Average collection period = (accounts receivable / sales) x number of days in a year
A business’s liquidity will be higher if its average collection period is shorter (60 days or fewer).
Another liquidity metric, the receivables turnover ratio, is calculated using the average collection period.