What is the average collection period?

Average collection period measures the typical number of days between issuing an invoice and receiving payment, calculated by dividing accounts receivable by average daily credit sales. For professional service firms, this metric indicates collection efficiency and working capital tied up in receivables. Lower collection periods mean faster cash conversion and less working capital requirement.

Key characteristics

• Measures days from invoice to payment receipt

• Calculated as AR divided by daily credit sales

• Lower numbers indicate faster collection

• Should be compared to the payment terms offered

• Trend analysis reveals collection changes

• Directly impacts working capital needs

Why it matters for professional service firms

Average collection period quantifies how long money is tied up in receivables. A firm with a 45-day average collection period and $3M in annual revenue has approximately $370K in AR tied up at any given time. Reducing to 35 days frees $82K in working capital. Professional service firms should track the average collection period monthly and compare it to payment terms (e.g., if terms are Net 30 and collection is 45 days, clients are paying 15 days late on average). Deteriorating collection period warns of emerging problems.

Real-world example

Kevin's firm offered Net 30 terms but never measured the actual collection period. Analysis: average collection period was 52 days, meaning clients paid 22 days late on average. With $2.4M revenue, this represented approximately $150K more tied up in AR than if clients paid on time. Collection improvement initiative: reminder at 25 days, call at 35 days, escalation at 45 days. After 6 months: average collection period improved to 38 days (still 8 days late, but much better). Freed approximately $90K in working capital through faster collection.