Do you know your company's average collection period?
Posted: Wed Dec 18, 2024 6:39 am
Optimizing the average collection period is key for companies, as it will mean having more liquidity and saving on financial costs.
In this article we explain what the average collection period (APP) consists of.
Find out how to calculate and optimize it with these simple tips.
Start of marked textTWEET IT! This is how your company's average collection period is calculated.End of marked text
Ensuring the company's liquidity at the lowest possible financial cost is one of the main tasks of the financial managers of companies. To achieve this objective, optimizing the average collection period (ACP) and the average payment period (APP) is key.
By analyzing the PMC and PMP, you democratic republic of the congo email list
can know the financial status of the company and the negotiating power it has with customers and suppliers.
In this article we will focus on the analysis of the average collection period.
Download the FREE guide “The art of getting paid (on time)”
What is the average collection period?
The Average Collection Period can be defined in the following ways:
Days that, on average, a company takes to collect payments from its customers.
From the point of view of the operating cycle, it would be the number of days that pass from when we sell a product until payment is made.
From a financial point of view , it would be the number of days that we are financing our clients.
Generally, companies should try to reduce their average collection period. However, optimising this period must be in line with the necessary commercial credit period that companies grant.
If the company sells to large companies with which it does not have much bargaining power, they may impose a longer credit period. On the other hand, if the company has a strong demand for its products, it may reduce the commercial credit periods or require cash payment.
How is the average collection period calculated?
To calculate it, we must know the following:
Average number of clients that our company has during a period (normally one year) . It can be approximated more by adding the number of clients in the period we are studying and the previous one. And then dividing the result of this sum by two.
Sales for the year (or other period we are studying) . This includes the sales that our company has made during a given period, taking into account the application of VAT to our sales.
The formula for calculating the average collection period would be as follows:
PMC = 365*Average customer balance / (sales *(1+ VAT))
Practical example of calculating the PMC
Let's suppose that company “X” has a customer balance of 350,055 euros as of 31/12/2020 and 342,720 euros as of 31/12/2021. Therefore, the average customers for the period amount to 346,387.50 euros, which is the result of adding both figures and dividing by two.
Let us also assume that sales in 2021 were 2,827,550 euros. If we apply VAT (considering 21%), we have a turnover figure with VAT of 3,421,335.50 euros.
Improving the average collection period can be vital for our finances. To do this we can take the following actions:
Optimize the times of the sales process . The time between the sale and the final delivery of the goods or provision of the service must be optimized. A well-executed delivery process, without incidents, is necessary to achieve optimal billing and timely payment.
Optimize the invoicing process . Invoicing once the goods have been delivered or the service has been provided will improve the average collection period. If goods have been delivered at the beginning of the month, they should not be invoiced at the end, especially if the value is high.
In this article we explain what the average collection period (APP) consists of.
Find out how to calculate and optimize it with these simple tips.
Start of marked textTWEET IT! This is how your company's average collection period is calculated.End of marked text
Ensuring the company's liquidity at the lowest possible financial cost is one of the main tasks of the financial managers of companies. To achieve this objective, optimizing the average collection period (ACP) and the average payment period (APP) is key.
By analyzing the PMC and PMP, you democratic republic of the congo email list
can know the financial status of the company and the negotiating power it has with customers and suppliers.
In this article we will focus on the analysis of the average collection period.
Download the FREE guide “The art of getting paid (on time)”
What is the average collection period?
The Average Collection Period can be defined in the following ways:
Days that, on average, a company takes to collect payments from its customers.
From the point of view of the operating cycle, it would be the number of days that pass from when we sell a product until payment is made.
From a financial point of view , it would be the number of days that we are financing our clients.
Generally, companies should try to reduce their average collection period. However, optimising this period must be in line with the necessary commercial credit period that companies grant.
If the company sells to large companies with which it does not have much bargaining power, they may impose a longer credit period. On the other hand, if the company has a strong demand for its products, it may reduce the commercial credit periods or require cash payment.
How is the average collection period calculated?
To calculate it, we must know the following:
Average number of clients that our company has during a period (normally one year) . It can be approximated more by adding the number of clients in the period we are studying and the previous one. And then dividing the result of this sum by two.
Sales for the year (or other period we are studying) . This includes the sales that our company has made during a given period, taking into account the application of VAT to our sales.
The formula for calculating the average collection period would be as follows:
PMC = 365*Average customer balance / (sales *(1+ VAT))
Practical example of calculating the PMC
Let's suppose that company “X” has a customer balance of 350,055 euros as of 31/12/2020 and 342,720 euros as of 31/12/2021. Therefore, the average customers for the period amount to 346,387.50 euros, which is the result of adding both figures and dividing by two.
Let us also assume that sales in 2021 were 2,827,550 euros. If we apply VAT (considering 21%), we have a turnover figure with VAT of 3,421,335.50 euros.
Improving the average collection period can be vital for our finances. To do this we can take the following actions:
Optimize the times of the sales process . The time between the sale and the final delivery of the goods or provision of the service must be optimized. A well-executed delivery process, without incidents, is necessary to achieve optimal billing and timely payment.
Optimize the invoicing process . Invoicing once the goods have been delivered or the service has been provided will improve the average collection period. If goods have been delivered at the beginning of the month, they should not be invoiced at the end, especially if the value is high.