Average Payment Period Finance KPIs Library

To calculate your total net credit sales, take your total sales made on credit for a given period and subtract any returns and sales allowances. If you’re looking to streamline AP processes, automate invoice or payment processing, or curious about how accounts payable automation works, this is the guide for you. APP also helps you gain a more accurate view of finances and project how to calculate average payment period your cash flow more efficiently. In addition to monitoring weekly and monthly reports with cash movements, it is necessary to estimate revenues and expenses for future periods as an essential part of corporate financial planning. Offering Discount to the customers in case they are paying the credit in advance, offering 2 % discount in case customer paid in first ten days.

• Find out how AP automation can not only help your business combat fraud, but also save you money.
• In our above example, what if you had been doing a quarterly report but used the same numbers from the annual report.
• In Versapay, you can segment customer accounts send personalized messages prompting your customers to remit payments on time.
• Ideally, this period can be reduced as much as possible, although it should always be measured in comparison to the credit terms being offered to the company in question.

Companies may also compare the average collection period with the credit terms extended to customers. For example, an average collection period of 25 days isn’t as concerning if invoices are issued with a net 30 due date. However, an ongoing evaluation of the outstanding collection period directly affects the organization’s cash flows. The average collection period is an accounting metric used to represent the average number of days between a credit sale date and the date when the purchaser remits payment.

Autonomous Accounting

Average collection period can inform you of how effective—or ineffective—your accounts receivable management practices are. It does so by helping you determine short-term liquidity, which is how able your business is to pay its liabilities. To address your average collection period, you first need a reliable source of data.

It can set stricter credit terms limiting the number of days an invoice is allowed to be outstanding. This may also include limiting the number of clients it offers credit to in an effort to increase cash sales. It can also offer pricing discounts for earlier payment (i.e. 2% discount if paid in 10 days). Like accounts payable turnover ratio, average payment period also indicates the creditworthiness of the company. However, a very short payment period may indicate that the company is not taking full advantage of its allowed credit terms. Something that is very important to consider when beginning to calculate the average payment period for a company is the number of days within a period.

Average Collection Period Formula

For example, say you want to find Light Up Electric’s average collection period ratio for January. At the beginning of the month, your beginning balance of accounts receivable was $42,000, and your ending accounts receivable balance was $51,000. The first step in calculating your average collection period is to find your average accounts receivable. To do this, you take the sum of your starting and ending receivables for the year and divide it by two.

Learn more about AP automation and how it supports timely invoice payments and strong supplier relationships – helping organizations improve cash flow and boost the bottom line. With the right ag-aviation management platform, you can have access to a complete financial module with control of accounts payable and receivable, payroll, cash flow and several other functions. In an accounts section, you can apply filters by date, category and cost center, in addition to receiving notices whenever an expiration date is near.