The Management of Collection Period

The Average Collection Period = Opening days . Average Accounts receivable Sales

It is measuring the average time lag between sale and receipt of cash from the sale.

The ACP varies a great deal among industries. Almost zero in the supermarket business, it may be very long in some industries. It varies also very much among countries.

What is crucial to assess is the trend !

Example :

Click here to see the source of data

Starworld Group	2021	2022	2023
Sales	2784	3341	4343
Accounts Receivable at the beginning of the year	?	232	278
Accounts Receivable at the end of the year	232	278	362
Average Accounts Receivable	?	255	320
Opening days	365	365	365
Collection Period (days)	?	28	27

 

Starworld Group	2022	2023
Cash receipt	3295	4259
- Accounts Receivable at the beginning of the year	232	278
+ Accounts Receivable at the end of the year	278	362
Sales	3341	4343

Note : The sales depend on the demand. So if the Average Collection Period in days is

higher or lower than 27-28 days, it will not affect the sales but the CASH.

An increase of Average Collection Period in days reduces the CASH. In other words, that means more Accounts Receivable and, of course, less payments from the customers.

 

Sources :

Interpreting and using Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University

Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Lausanne, Switzerland, 2024