Understanding the Average Collection Period
The Average Collection Period (ACP) quantifies a company's efficiency in collecting payments from credit customers. It is computed by dividing average accounts receivable by daily net credit sales. Unlike gross revenue metrics, ACP focuses specifically on credit transactions — cash sales are excluded because they don't create receivables.
A 2024 PwC Working Capital Report found that optimising collection periods by just 5 days across the Fortune 500 would collectively release over $100 billion in trapped working capital.
ACP vs. Credit Terms Benchmark
| ACP Relative to Terms | Classification | Collections Health |
|---|---|---|
| Within 110% of terms | Excellent | Customers paying promptly |
| 110–133% of terms | Good | Minor late payments |
| 133–167% of terms | Moderate | Systematic late payment issues |
| > 167% of terms | Poor | Credit policy overhaul needed |
Formula
ACP = \frac{\text{Average Accounts Receivable}}{\text{Net Credit Sales}} \times 365
\text{A/R Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}
ACP = \frac{365}{\text{A/R Turnover}}
Working Capital Impact
Every day of excess ACP represents cash that could fund operations, reduce debt, or earn investment returns. For a company with $2M annual credit sales, reducing ACP by 10 days releases:
\frac{\$2{,}000{,}000}{365} \times 10 = \$54{,}795 \text{ in freed working capital}
Improvement Strategies
- Implement invoice automation with automatic reminders
- Offer early payment discounts (e.g., 2/10 Net-30)
- Review credit limits for chronic late payers
- Require deposits on large orders