The accounts receivable collection period can be defined as a period that is required to collect the accounts receivables for a business. In order to calculate the accounts receivable collection period the receivables are compared with the total sales of the business to find out the proportion. The low figure of the accounts receivable is considered to be the best that means the accounts receivable collection period is small and less funds of the business are locked up in accounts receivables. This also indicates that there is a less risk of payments defaults or bad debts from the customers as accounts are readily received by the company.
Account receivable collection period is one of the most useful measures when it is compared to the actual number of days allowed to the customer after purchase and before the payment of that purchase is due. For example the accounts receivable collection period of 40 days seems to be excellent and quite short until or unless it is compared with Standard payment term days that are only 5 days.
if the average collection period of accounts receivable is only a few days longer than the standard payment days this is an indication of robust collection activity of the receivables and a prudent credit granting. In order to calculate the collection period the annual sales of the business are divided by 365 to reach at the figure of the daily sales. The average accounts receivable for that period is then divided with the above calculated figure. This formula can be shown as under:-
Accounts receivable collection period = Average Accounts Receivable/ (Annual sales /356)