Tracking cash flow is a constant challenge for QuickBooks users. We all agree that optimizing the collection process is critical to small business success.
By learning how to accurately calculate your average collection period in QuickBooks, you can gain control over your accounts receivable and improve working capital management.
In this post, you'll discover step-by-step instructions for measuring average days to collect accounts receivable. You'll also learn proven tips for reducing your collection period through payment incentives, credit policies, and other best practices.
Introduction to Calculating Average Collection Period in QuickBooks
This section provides an overview of the average collection period metric and why it's important for QuickBooks users to track. It outlines the key topics covered in this guide.
Defining Average Collection Period
The average collection period refers to the average number of days between when a sale occurs and when payment is collected from the customer. Tracking this metric helps small businesses effectively manage cash flow.
Why It Matters for QuickBooks Users
A shorter average collection period allows businesses to reinvest and access cash more quickly. This guide breaks down how to accurately calculate your average collection period right within your QuickBooks reports.
Understanding the Cash Conversion Cycle
The average collection period is a key component of a company's overall cash conversion cycle. This is the number of days between when a business pays for inventory and when it collects payment from customers. It includes:
- Days Inventory Outstanding - Average time raw materials are in inventory before being sold
- Days Sales Outstanding (Average Collection Period) - Average time to collect cash from customers
- Days Payable Outstanding - Average time taken to pay suppliers
Monitoring all three metrics gives managers better insight into cash flow. A shorter, more efficient cash conversion cycle improves business performance.
How do you calculate the average collection period?
The average collection period measures how long it takes a company to collect payment on credit sales. Here are the steps to calculate it in QuickBooks:
-
Navigate to Reports > Company & Financial > Cash Flow Statement.
-
Locate the Accounts Receivable line item for the period. This shows the total amount owed by customers at the end of the period.
-
Divide this Accounts Receivable balance by the total Sales amount for the same period.
-
Multiply the result by 365 to get the average collection period length in days.
For example, if Accounts Receivable was $100,000 and Sales was $1,000,000 for the year, the average collection period would be:
$100,000 / $1,000,000 x 365 = 36.5 days
This means it takes about 36-37 days on average for the company to collect payments from customers after a sale was made.
The lower the average collection period, the better the company's cash flow. By tracking this metric over time, you can monitor improvements in accounts receivable management.
Some tips for lowering your average collection period include:
- Set clear payment terms with customers
- Send invoices promptly
- Follow up on overdue invoices
- Offer payment plans if needed
- Consider accepting credit card payments
Reducing the payment collection timeframe improves business liquidity and financial health. Monitoring your company's average collection period in QuickBooks provides helpful insight.
How do you calculate debt collection period?
The debt collection period, also known as the average collection period (ACP), measures how long it takes a company to collect payment on credit sales. Here are the key steps to calculate ACP in QuickBooks:
1. Identify Accounts Receivable and Credit Sales
First, you need to know the balances of two accounts in QuickBooks:
-
Accounts Receivable: This shows how much money customers owe you at a point in time. It can be found on the Balance Sheet.
-
Credit Sales: This shows total sales made on credit over a period of time, such as a month or year. It can be found on the Income Statement.
2. Calculate Average Accounts Receivable
Take the ending and beginning Accounts Receivable balances for the period and calculate the average. This estimates the average amount outstanding from customers over that timeframe.
For example, if beginning AR was $5,000 and ending AR was $8,000 for the month, the average would be $6,500 (($5,000 + $8,000) / 2).
3. Divide Average AR by Credit Sales
Next, divide the average AR calculated above by the total Credit Sales over the same period.
Using the example above with $6,500 average AR and $100,000 in Credit Sales:
$6,500 / $100,000 = 0.065
4. Multiply Result by Number of Days
Finally, multiply the result above by the number of days in the period measured, usually 365 days for a full year.
0.065 x 365 = 23.7 days
This final number shows the average number of days it takes to collect payment from customers, which is about 24 days in this example. The lower the better!
By calculating ACP each period in QuickBooks, you can monitor trends and aim to reduce the time it takes to collect from customers. Reaching out early to past due accounts can help improve your cash flow.
What is the general rule for average collection period?
The average collection period, also known as days sales outstanding (DSO), is an important metric for assessing the efficiency of a company's billing and collection processes. Here is a quick overview of how to calculate average collection period in QuickBooks:
The general formula is:
Average Collection Period = Number of Days in Period / Accounts Receivable Turnover
Where:
Accounts Receivable Turnover = Total Credit Sales / Average Accounts Receivable
For example, if a company had $1,200,000 in total credit sales over the past year and an average accounts receivable balance of $300,000 over the same period, the accounts receivable turnover would be:
$1,200,000 / $300,000 = 4 times
This means the company turned over its average receivables balance 4 times during the year.
To find the average collection period, use the formula:
365 days / 4 times = 91 days
So the average collection period is 91 days. This means it takes approximately 91 days on average for the company to collect payment on its credit sales.
The quicker a company can collect payment from customers after a sale is made (i.e. the lower the average collection period), the better it is for cash flow. Companies should aim to reduce their collection period as much as possible through efficient billing and collections practices.
Monitoring trends in average collection period over time can indicate whether billing and collections processes are improving or worsening. Spikes may signal issues that need to be addressed.
How do I calculate DSO in Quickbooks?
Here are the steps to calculate Days Sales Outstanding (DSO) in QuickBooks:
-
Calculate average accounts receivable. Pull a balance sheet report in QuickBooks for the time period you want to analyze. Add up the accounts receivable balance on the first and last day of the period, then divide by 2 to get the average AR for the period.
-
Find total credit sales. Run a QuickBooks Income Statement report for the same time period. Look at the total sales amount. Since most small businesses sell only on credit, you can use total sales here.
-
Find the total number of days in the time period. Count the number of days in the period you are analyzing.
-
Apply the numbers to this DSO formula:
DSO = Average AR / (Total Credit Sales / Number of Days)
For example:
- Average AR = $50,000
- Total Credit Sales = $250,000
- Time Period = 90 days
DSO = $50,000 / ($250,000 / 90) = 60 days
In this example, it takes 60 days on average to collect payment from customers after a sale is made. The lower the DSO, the faster a business collects from customers.
Monitoring DSO regularly helps identify collection issues before they become severe. If DSO rises substantially above your average, it may signal problems getting paid on time. Take steps to follow up with late paying customers to bring DSO back in line.
sbb-itb-beb59a9
Preparing to Calculate Average Collection Period
This section will cover where to locate the specific figures needed from QuickBooks to measure average collection period for your small business.
Locating Total Credit Sales for the Period
Navigate to Reports > Sales > Sales by Customer Summary to find total credit sales for any custom date range.
- Select the date range for which you want to calculate the average collection period. For example, the past 12 months.
- Scroll down to view the total credit sales amount for that period. This will be used to calculate the average collection period formula.
Finding Accounts Receivable Balance
The accounts receivable balance can be found on the QuickBooks balance sheet for the last day of the measurement period.
- Go to Reports > Company & Financial
- Select Balance Sheet Standard
- Choose the end date for the average collection period measurement period
- Locate the Accounts Receivable line item balance
This balance will be used in the average collection period formula.
Identifying Days in the Period
Determine the number of days in the period for which the average collection period is being calculated.
- For a 12 month period, there are 365 days
- For a quarterly period, there are around 90 days
- For a monthly period, there are around 30 days
Accurately counting the number of days is crucial for calculating the time component of the average collection period formula.
Having located the key inputs from QuickBooks, you can now calculate the average collection period using the simple formula:
Average Collection Period = (Accounts Receivable / Total Credit Sales) x Number of Days
Entering the figures from the reports above into this formula will produce the average number of days it takes to collect payment from customers. Tracking this metric over time can provide insight into the financial health and cash flow patterns of your small business.
Step-by-Step Calculation of Average Collection Period
The average collection period measures how long it takes for a business to collect payment on its credit sales. By calculating this metric in QuickBooks, you can better understand your accounts receivable cycle and cash flow.
Here is a step-by-step walkthrough to calculate your average collection period using QuickBooks reports:
Input Credit Sales for the Period
First, you'll need to determine the total credit sales made during the period you want to analyze. To find this:
- Go to Reports > Sales > Sales by Customer Summary
- Set the date range for the period you want to analyze
- The total at the bottom of the report under "Credit Sales" is the amount to input
For example, if the period is January 1 - January 31 and your credit sales for the month were $100,000, you would input $100,000.
Input Accounts Receivable Balance
Next, determine the ending accounts receivable balance. This is the total amount owed to your business from customers at the end of the period. To find this:
- Go to Reports > Company & Financial > Balance Sheet
- Select the last date of the period you are analyzing
- The accounts receivable amount is the number to input
So if your accounts receivable balance on January 31 was $40,000, you would input $40,000 for this step.
Divide and Calculate the Ratio
Now divide the credit sales by the accounts receivable balance:
Credit Sales / Accounts Receivable = Ratio
$100,000 / $40,000 = 2.5
This ratio shows how many times your accounts receivable turned over during the period based on sales.
Multiply by Days in the Period
Finally, multiply the ratio by the number of days in the period:
Ratio x Period Length in Days = Average Collection Period
2.5 x 31 days = 77.5 days
So for January, the average collection period was 77.5 days. This means it took over 2 and a half months on average to collect payment on credit sales made in January.
Monitoring trends in your average collection period is crucial to managing cash flow. Taking steps to collect from customers quicker can improve your business's financial operations.
Integrating Average Collection Period into the Cash Conversion Cycle
The average collection period is an important metric to incorporate into the cash conversion cycle analysis. This provides a more comprehensive view of a company's financial health and working capital management.
Linking to Days Inventory Outstanding
The average collection period measures how long it takes to collect payment from customers after a sale is made. This directly impacts days inventory outstanding, which measures the average time raw materials sit in inventory before being sold. If it takes longer to collect payments from customers, it will increase the days inventory outstanding.
Slower collections tie up cash in inventory rather than freeing it up for other uses. Understanding this link allows businesses to better align their inventory purchasing and manufacturing with expected collections.
Combining with Days Payable Outstanding
The average collection period can also be compared to days payable outstanding, which is the average time taken to pay suppliers. Efforts to align both metrics can improve cash flow.
For example, negotiating longer payment terms with suppliers to increase days payable outstanding while decreasing the average collection period through faster customer collections can reduce the cash conversion cycle and free up capital.
Calculating Total Cash Conversion Cycle
The formulas for calculating the complete cash conversion cycle is:
Cash Conversion Cycle = Days Inventory Outstanding + Average Collection Period - Days Payable Outstanding
The average collection period directly impacts this metric. Reducing this by collecting from customers faster improves the cash conversion cycle by reducing the time capital is trapped between purchasing inventory and receiving customer payments.
Tracking the average collection period and incorporating it into the cash conversion cycle analysis provides visibility into how efficiently a business is managing working capital through its customer credit and collections processes. This supports better financial and inventory management decisions.
Automating Average Collection Period Measurement in QuickBooks
Beyond manual calculation, QuickBooks also offers automated reporting tools to consistently track average collection period over time.
Setting Up Memorized Reports
You can create memorized reports in QuickBooks that automatically calculate your average collection period each month or quarter.
To set this up:
- Go to Reports > Memorized Reports
- Click the Memorize Report button
- Select the Cash Flow Statement report
- In the Report Date field, set the date range to the period you want to track
- Check the box for "Refresh on open"
- Click Memorize
Now each time you open this report, it will automatically pull the latest data and recalculate metrics like average collection period. You can schedule the report to run monthly or quarterly.
Utilizing the Cash Flow Dashboard
The Cash Flow dashboard in QuickBooks provides an overview of key cash flow metrics, including average collection period.
To enable it:
- Go to Company > Cash Flow Projections
- Select Cash Flow Dashboard from the left menu
- Customize the date range shown at the top
This dashboard displays average collection period alongside other indicators like accounts receivable turnover and cash on hand. Review it regularly to stay updated.
Scheduling Regular Review
Get in the habit of checking average collection period at least monthly. Set calendar reminders to review memorized reports and the cash flow dashboard.
Monitoring this metric consistently allows you to:
- Identify trends and seasonal fluctuations
- Catch payment issues early
- Assess the effectiveness of process changes
- Tighten up cash flow management
Consistent tracking and review enables data-driven decisions to optimize cash flow.
Strategies for Optimizing Your Collection Process
This section provides actionable strategies for reducing average collection period to accelerate cash flow for your small business.
Invoice Early and Clearly
Send professional invoices as soon as work is completed to start the clock on collections. Be sure to include clear payment terms and due dates to set expectations upfront.
Offer Payment Plans
Consider breaking large balances into installments to receive partial payment sooner. This allows customers flexibility while still bringing in revenue on your timeline.
Implementing Payment Incentives
Explore the use of early payment discounts or other incentives to encourage quicker customer payments. Even a small percentage discount can motivate customers to prioritize paying your invoices faster.
Reviewing Customer Credit Policies
Assess and adjust customer credit policies to ensure they align with your business's cash conversion cycle goals. Consider shortening payment terms or reducing credit limits to accelerate incoming payments.
Conclusion: Leveraging Average Collection Period for Better Cash Management
Summary of Key Takeaways
The average collection period is an important metric for assessing the efficiency of your accounts receivable process and overall working capital management. By calculating it regularly in QuickBooks, you can identify trends and opportunities to improve cash flow. Key takeaways include:
-
The average collection period measures how long it takes to collect payment from customers on average. It is calculated by dividing average accounts receivable by total net credit sales per day.
-
A shorter average collection period is generally desirable as it indicates payments are being collected from customers more quickly.
-
By segmenting customers, you can identify differences in payment behavior and tailor collection processes accordingly.
-
Optimizing your invoicing and collections process to reduce the average collection period can directly improve cash flow available to fund operations and growth.
Further Reading and Resources
To continue improving working capital efficiency, check out these additional resources:
- QuickBooks Guide to Understanding Cash Flow Reports
- 5 Ways to Collect from Customers Faster
- Accounts Receivable Best Practices Checklist
Leverage the learning from this guide to analyze your full cash conversion cycle. Identifying opportunities across payables, receivables and inventory will compound the cash flow benefits.
Applying Knowledge to the Cash Conversion Cycle
While this guide focused specifically on the average collection period, keep in mind that it is one component of the overall cash conversion cycle. By applying the same analysis across accounts payable, inventory and other drivers of working capital, you can optimize the entire cycle for even greater cash flow improvement. Use the knowledge gained here as part of a holistic approach.
