Average Collection Period (ACP) Calculator
This tool calculates the Average Collection Period (also known as Days Sales Outstanding - DSO), which estimates the average number of days it takes a company to collect payment from its customers after a credit sale.
Enter the company's Accounts Receivable, Net Credit Sales for a specific period, and the number of days in that period. Ensure consistent currency units.
Enter Financial Data
Understanding Average Collection Period & Formula
What is the Average Collection Period?
The **Average Collection Period (ACP)**, also known as **Days Sales Outstanding (DSO)**, is a crucial financial metric that shows the average number of days it takes a company to convert its accounts receivable into cash. It indicates how efficiently a company is managing its credit and collections.
A shorter ACP generally implies efficient collection practices, while a longer ACP can signal potential issues such as poor credit policies, ineffective collection efforts, or struggling customers.
ACP Formula
The standard **Average Collection Period formula** is:
ACP = (Accounts Receivable / Net Credit Sales) * Number of Days in the Period
To calculate the ACP, you need:
- **Accounts Receivable:** The total amount of money owed to the company by its customers for goods or services sold on credit. You can use the balance at the end of the period or the average AR over the period for a more accurate result. This calculator uses the specific AR value you input.
- **Net Credit Sales:** The total revenue from sales made on credit during the period, minus any sales returns, allowances, or discounts. It's important to use only *credit* sales, not total sales (which might include cash sales), and net of returns.
- **Number of Days in the Period:** The total number of days covered by the Net Credit Sales figure (e.g., 365 for a year, 90 for a quarter, 30 for a month).
Note: For internal analysis, some companies calculate DSO using Total Net Sales instead of Net Credit Sales if breaking out credit sales is difficult. However, Net Credit Sales provides a more accurate measure related specifically to credit accounts.
Average Collection Period Examples
Click on an example to see the scenario and inputs/outputs:
Example 1: Annual Calculation (Standard)
Scenario: A company has $50,000 in Accounts Receivable at year-end and $600,000 in Net Credit Sales for the year.
Inputs:
- Accounts Receivable: $50,000
- Net Credit Sales: $600,000
- Days in Period: 365
Calculation: ACP = ($50,000 / $600,000) * 365 = 0.0833 * 365 = 30.42
Result: ACP ≈ 30.42 days. This company takes about 30 days on average to collect its receivables.
Example 2: Quarterly Calculation
Scenario: At the end of Q2, a company has $30,000 in AR. Their Net Credit Sales for Q2 were $180,000.
Inputs:
- Accounts Receivable: $30,000
- Net Credit Sales: $180,000
- Days in Period: 90 (for a quarter)
Calculation: ACP = ($30,000 / $180,000) * 90 = 0.1667 * 90 = 15.00
Result: ACP = 15.00 days. Collections are quite fast in this quarter.
Example 3: Company with Slow Collections
Scenario: A business extends Net 30 terms but has AR of $75,000 against annual Net Credit Sales of $500,000.
Inputs:
- Accounts Receivable: $75,000
- Net Credit Sales: $500,000
- Days in Period: 365
Calculation: ACP = ($75,000 / $500,000) * 365 = 0.15 * 365 = 54.75
Result: ACP ≈ 54.75 days. This is significantly longer than their Net 30 terms, indicating collection issues.
Example 4: Company with Fast Collections
Scenario: A company offers Net 45 terms but manages to keep AR low at $20,000 against annual Net Credit Sales of $400,000.
Inputs:
- Accounts Receivable: $20,000
- Net Credit Sales: $400,000
- Days in Period: 365
Calculation: ACP = ($20,000 / $400,000) * 365 = 0.05 * 365 = 18.25
Result: ACP ≈ 18.25 days. This is much shorter than their Net 45 terms, suggesting highly effective collections or perhaps early payment incentives.
Example 5: Monthly Calculation
Scenario: At the end of October (31 days), a company's AR is $10,000 and their Net Credit Sales for October were $45,000.
Inputs:
- Accounts Receivable: $10,000
- Net Credit Sales: $45,000
- Days in Period: 31 (for October)
Calculation: ACP = ($10,000 / $45,000) * 31 = 0.2222 * 31 = 6.89
Result: ACP ≈ 6.89 days. Very fast collections within the month.
Example 6: Impact of Increased AR
Scenario: Same company as Example 1, but AR increased to $70,000 with same annual sales.
Inputs:
- Accounts Receivable: $70,000
- Net Credit Sales: $600,000
- Days in Period: 365
Calculation: ACP = ($70,000 / $600,000) * 365 = 0.1167 * 365 = 42.58
Result: ACP ≈ 42.58 days. The increase in AR significantly lengthened the collection period.
Example 7: Impact of Increased Sales (AR Constant)
Scenario: Same company as Example 1, but Net Credit Sales increased to $800,000 with AR remaining at $50,000.
Inputs:
- Accounts Receivable: $50,000
- Net Credit Sales: $800,000
- Days in Period: 365
Calculation: ACP = ($50,000 / $800,000) * 365 = 0.0625 * 365 = 22.81
Result: ACP ≈ 22.81 days. The increase in sales (relative to AR) shortened the collection period.
Example 8: Using Average AR
Scenario: A company started the year with $45,000 AR, ended with $55,000 AR, and had $600,000 annual Net Credit Sales. Using Average AR.
Inputs:
- Accounts Receivable: $50,000 (Average AR = ($45,000 + $55,000) / 2)
- Net Credit Sales: $600,000
- Days in Period: 365
Calculation: ACP = ($50,000 / $600,000) * 365 = 0.0833 * 365 = 30.42
Result: ACP ≈ 30.42 days. Using average AR provides a more representative figure for the period.
Example 9: Scenario with Zero Net Credit Sales (Error Case)
Scenario: A company had $10,000 in AR at the end of a month but zero Net Credit Sales for that month.
Inputs:
- Accounts Receivable: $10,000
- Net Credit Sales: $0
- Days in Period: 30
Calculation: Involves division by zero.
Result: The calculator will show an error, as ACP cannot be calculated if there are no credit sales in the period.
Example 10: Comparing Two Periods
Scenario: Compare Q1 (AR $25k, NCS $150k, Days 90) to Q2 (AR $30k, NCS $180k, Days 90) to see trend.
Q1 Inputs: AR $25,000, NCS $150,000, Days 90. ACP = ($25,000 / $150,000) * 90 = 16.67 days.
Q2 Inputs: AR $30,000, NCS $180,000, Days 90. ACP = ($30,000 / $180,000) * 90 = 15.00 days.
Conclusion: ACP improved slightly from Q1 to Q2 (decreased from 16.67 to 15.00 days), indicating faster collections in the second quarter.
Frequently Asked Questions about Average Collection Period
1. What does Average Collection Period measure?
It measures the average number of days it takes a company to collect payments owed by customers from credit sales. It's a measure of receivables management efficiency.
2. What is the formula for ACP?
The standard formula is: ACP = (Accounts Receivable / Net Credit Sales) * Number of Days in the Period.
3. Should I use Net Credit Sales or Total Sales?
For the most accurate calculation related to credit management, use **Net Credit Sales**. This excludes cash sales and reflects only the revenue that needs to be collected from credit customers.
4. Should I use the period-end AR or average AR?
Using the **average Accounts Receivable** balance over the period (e.g., beginning AR + ending AR / 2) is generally preferred as it smooths out fluctuations and provides a more representative figure for the entire period covered by the sales data.
5. What does a high ACP vs. a low ACP indicate?
- **High ACP:** May suggest slow collections, lenient credit terms, ineffective collection efforts, or customers facing financial difficulties. Can strain cash flow.
- **Low ACP:** Generally positive, indicating efficient collections and healthy cash flow. Could potentially mean overly strict credit terms that deter sales, though this is less common.
6. What is considered a "good" ACP?
A "good" ACP is relative. It should be compared to the company's stated credit terms (e.g., Net 30 terms usually aim for an ACP around 30-40 days), industry benchmarks, and the company's historical trend. An ACP significantly longer than credit terms is a red flag.
7. Can ACP be negative?
No, ACP cannot be negative. Accounts Receivable, Net Credit Sales, and Days in Period are all non-negative values. If the calculation results in zero or near-zero days, it means collections are immediate (likely cash sales, but since we use credit sales, it would imply extremely rapid payment) or the inputs were zero/invalid.
8. What is the relationship between ACP and DSO?
Average Collection Period (ACP) and Days Sales Outstanding (DSO) are typically used interchangeably to mean the same metric.
9. How can a company improve its ACP?
Strategies include stricter credit policies, offering early payment discounts, sending timely invoices and reminders, implementing clear collection procedures, and using automated invoicing/payment systems.
10. Is ACP the same as Accounts Receivable Turnover?
They are related but different. Accounts Receivable Turnover measures how many times AR is collected over a period (Net Credit Sales / Accounts Receivable). ACP converts this turnover into days (Days in Period / AR Turnover), providing an average collection time.
