1. What is Collection Period?

The Collection Period (also called Days Sales Outstanding) measures how long it takes a company to collect payments from its customers. It indicates the efficiency of a company's accounts receivable management.

2. How Does the Calculator Work?

The calculator uses the Collection Period formula:

Where:

• \( \text{Receivables} \) — Accounts receivable balance (currency)
• \( \text{Sales} \) — Annual sales revenue (currency/year)

Explanation: The formula converts the receivables-to-sales ratio into days by multiplying by 365 (days in a year).

3. Importance of Collection Period

Details: A shorter collection period is generally better, indicating faster conversion of sales to cash. However, very short periods might suggest overly strict credit policies that could limit sales.

4. Using the Calculator

Tips: Enter accounts receivable balance and annual sales in the same currency. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good collection period?
A: It varies by industry, but generally 30-60 days is typical. Compare with industry averages and your credit terms.

Q2: How does collection period affect cash flow?
A: Longer collection periods tie up more capital in receivables, potentially creating cash flow problems.

Q3: Should I use credit sales or total sales?
A: Ideally use credit sales, but if not available, total sales can be used as an approximation.

Q4: How can I improve my collection period?
A: Strategies include offering early payment discounts, stricter credit policies, or improved collection processes.

Q5: What if my business is seasonal?
A: For seasonal businesses, consider calculating collection period for each quarter separately for more accurate analysis.