Improving Average Collection Period

For most businesses, the time it takes to collect on a customer's account is generally the step requiring the most amount of time in the cash conversion period. The time it takes your business to collect your accounts receivable is measured by the average accounts receivable collection period. This average defines the relationship between your accounts receivable and your cash flow.

Your credit policy and credit terms play an important role in the amount of time it takes to collect a customer's account. For example, if your credit terms provide your customers with 30 days to pay their bills, then you should expect that your average collection period will be somewhere around 30 days — maybe longer. Your credit policy and credit terms can also be used to accelerate and improve your cash inflows. Your efforts to collect on your customers' accounts also have a direct impact on accelerating and improving your cash flows. For more information on improving your collection efforts, see improving your collection cycle.