You make the sale. The invoices go out. Then you hear nothing. Days pass. Weeks pass. Outstanding invoices pile up. Your cash remains tied up. A slow collections process drains your resources.
That's where tracking your average collection period becomes a game changer for your financial stability.
It tells you exactly how long it takes to convert your invoices into cash flow. Shortening that cycle frees up cash flow and reduces stress. Keeping a close eye on your accounts receivable turnover and average collection period helps your business grow. Here's everything scrappy finance teams need to know about streamlining the collections process, boosting financial stability, and using Runway to turn insights into action.
1. What is average collection period, and why does it matter?
Average collection period measures how many days, on average, it takes your company to collect payment after making a credit sale. A closely related metric is accounts receivable turnover, which looks at how many times per year you collect your average accounts receivable. By calculating your average collection period, you see the real impact of your payment terms on your daily cash flow. Fast collections support long-term financial stability.
The formula relies on three elements: average accounts receivable, net credit sales, and the number of days in the period.
The formula is:
Average Collection Period = (Average Accounts Receivable / Net Credit Sales) × Number of Days in Period
Where:
- Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
- Net credit sales = Total sales on credit (excluding cash sales)
- Number of days = 365 for an annual period, 90 for quarterly, and 30 for monthly
Finance teams monitor this metric to understand cash flow patterns. It helps evaluate the effectiveness of your credit policies and your overall collections process. A healthy collections process ensures your invoices get paid quickly. With Runway's reporting feature, you track your average collection period, net credit sales, and other key indicators in real time.
2. How to calculate it step by step
Let's break down the calculation process for your average collection period. You need your average accounts receivable and your net credit sales.
- Find your beginning and ending accounts receivable balances for the given number of days
- Calculate your average accounts receivable by adding the beginning and ending balances and dividing by two
- Determine your net credit sales for the period
- Divide your average accounts receivable by your net credit sales
- Multiply that result by the number of days in the period
Example: Your company has a beginning accounts receivable balance of $80,000, an ending balance of $120,000, and net credit sales of $1,000,000 for the 365-day year.
- Average accounts receivable = ($80,000 + $120,000) / 2 = $100,000
- Average collection period = ($100,000 / $1,000,000) × 365 = 36.5 days
This result means it takes your company 36.5 days on average to collect payment on your invoices after a sale. To calculate your accounts receivable turnover for the same period, you divide your net credit sales by your average accounts receivable. A high accounts receivable turnover ratio points to an efficient collections process and solid financial stability. Learn more from Investopedia and Accounting Insights.
Runway's intuitive modeling makes calculating these metrics automatic. It gives your cross-functional team instant visibility into your payment terms and collections process.
3. What average collection period tells you about your operations
Your average collection period and your accounts receivable turnover provide clear insights into your business health. Strong metrics reflect excellent financial stability and a smooth collections process.
Short collection period
- Improved cash flow and superior financial stability
- Effective credit policies and clear payment terms
- A highly efficient collections process for unpaid invoices
- Overly strict payment terms strain customer relationships
Long collection period
- Cash flow problems stemming from unpaid invoices
- Ineffective credit policies or a disorganized collections process
- Working capital tied up instead of funding growth
- Lower accounts receivable turnover and weaker financial stability
According to a 2024 FERF study, reducing your average collection period by 20% increases available working capital by 15%.
External factors shape your metrics. Industry norms, seasonality, payment terms, and your specific customer mix all influence your average collection period and accounts receivable turnover. Accrual accounting easily distorts results. This calculation also excludes cash sales and focuses purely on net credit sales. It looks at the number of days but completely ignores the quality of your outstanding invoices.
Collaborative planning in Runway allows your entire team to analyze these factors together. You gain the power to revise your credit policies and improve your entire collections process inside companies of any size.
4. What's a good benchmark?
Industry standards vary significantly based on your specific payment terms and credit policies. Finding a good benchmark is about understanding a standard number of days for your market.
- Manufacturing: 45 to 60 days
- SaaS and subscription services: 30 to 45 days
- Retail: 20 to 40 days
- Healthcare: 40 to 55 days
You find additional benchmark data from Serrala on how to calculate average collection period.
According to KPI Sense, accounts receivable cycles in SaaS normally last 30 days. Benchmark your average collection period against your competitors. Tracking your accounts receivable turnover and net credit sales establishes a baseline to improve your cash flow and secure your financial stability.
Your growth stage and payment terms dictate what looks like success. Runway's industry template library helps model owners compare performance against relevant benchmarks. This keeps your collections process right on track.
5. How Runway helps you reduce collection days
Runway gives you the power to optimize your collections process without vendor bottlenecks. We help you monitor your invoices, average accounts receivable, and net credit sales.
- View a real-time receivables dashboard showing current and historical average collection periods
- Test how changes to your payment terms and credit policies impact your cash flow
- Use drill-in capabilities to identify exactly which invoices increase your number of days to collect
Here's how you improve your average collection period with Runway:
- Import your accounts receivable data through our self-serve accounting data integrations
- Use time comparisons to monitor your average accounts receivable and net credit sales over a set number of days
- Model the true impact of revising your credit policies and payment terms to boost accounts receivable turnover
Every day shaved off your average collection period unlocks vital cash flow. You inject that cash flow directly into building your financial stability.
- Redeploy funds into revenue-driving activities
- Reduce borrowing and cover outstanding invoices
- Smooth over seasonal dips in net credit sales
- Improve your business agility and accounts receivable turnover metrics
Transform your collections process from a financial bottleneck into a massive strategic advantage. Stop firefighting and start leading.
Book a demo today to see how Runway helps you optimize your entire cash flow cycle.