Average Collection Period (ACP)

The average collection period (ACP) is the average amount of time that it takes a business to collect its accounts receivable. It is easily calculated from the balance sheet (rather than the more tedious approach of making a list of the amount of time that each individual customer takes to pay and then averaging). If AR is the level of accounts receivable and S is the annual sales or revenues, then ACP is

For example, if Internal Specialists LLC has annual revenues of $20 million and at year-end has $5 million in accounts receivable, then its average collection period is (5 × 365) ÷ 20 = 91.25 days. This means that Internal Specialists takes, on average, 91 days to collect payment on an account.

A long average collection period means the firm has more money tied up in its accounts receivable. Decreasing the ACP, either through improved collection procedures or through factoring, frees up money that can be used elsewhere in the business. For example, if Internal Specialists could reduce its ACP from 91.25 days to 60 days, then the accounts receivable balance would decrease from $5 million to (60 × $20 million) ÷ 365 = $3.29 million. This would free up $5 million – $3.29 million = $1.71 million in funds that could be used to purchase new equipment, or paid out in salary or bonus. Note, though, that this $1.71 million would be a one-time cash flow—it would not occur year after year.