Collection Period

Collection period

See: Collection ratio

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collection period

The number of days, on average, that a firm requires for collection of a credit sale. The length of the collection period indicates the effectiveness with which a firm's management grants credit and collects from customers. A short period is desirable because the firm obtains cash more quickly for reinvestment or for paying its own bills. The collection period is calculated by dividing accounts receivable by average daily credit sales. Also called average collection period.

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Collection Period

The average amount of time it takes for a business to collect on its accounts receivable. This is calculated by multiplying the amount in accounts receivable by the number of days in a given period and dividing by the total amount of credit sales. The lower the collection period is, the more likely a business is to remain solvent. The collection period is also a way to determine how a business' credit risk compares to its competitors.