What is the average collection period?

The concept of average collection period is conceived as the total number of days that a , entity or institution takes time to receive the payment corresponding to the provision of services requested by one of its clients.

Therefore, the average collection period is also understood as the period of time that a company is financing its customers directly or indirectly.

How is the average collection period calculated?

To make an estimate of the calculation of the average collection period, it is necessary to take into account the average customer balance and the number of sales. Therefore, the formula to calculate the average collection period is reflected as follows:

Average Collection Period (PMC) = (Average Balance of Customers / Sales) x 365

However, it is always recommended that the average collection period is less than the average payment period, since in this way if the average payment period is higher, it can be collected before paying the debts with the Suppliers corresponding.

Calculate the Average Collection and Payment Period

The needs of the company and the average collection period

The average collection period is essential for the company because the degree of delinquency can limit the ability of a company to meet its corresponding payments, and this can have serious consequences with respect to its financial costs.

In this sense, there are fixed deadlines to complete the average collection period for both private companies and public companies. This is the case in Spain, in which the PMC for a public entity reaches up to 30 days. While the PMC for a private entity reaches a maximum of 60 days. If the average collection period is not balanced, this will imply that the company has to use its funds to meet the payments, therefore it will be financing in the short term.

All these collections will be managed by the company's treasury and in terms of the situation balance, the average collection periods will be included in what is known as cash flow and it is essential for business negotiation.

Measure your average collection and payment period with Excel

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