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What is the Average Collection Period?

The Average Collection Period (ACP), also known as Days Sales Outstanding (DSO), is a financial metric that measures the average number of days it takes for a company to collect payments from its customers after a sale has been made. It is a crucial indicator of a company’s accounts receivable efficiency.

Importance of Average Collection Period in Accounting:

  1. Cash Flow Management:
  1. Credit and Collection Policies:
  1. Financial Health Assessment:

Advantages of Average Collection Period:

  1. Improved Cash Flow:
  1. Risk Management:

Disadvantages of Average Collection Period:

  1. Limited Context:
  1. Industry Variability:

Example of Average Collection Period for a Wholesaler or Retailer Business:

Let’s consider a wholesaler that supplies goods to retailers on credit terms. The ACP for this wholesaler involves:

  1. Credit Terms:
  1. Days Sales Outstanding (DSO) Calculation:

A shorter ACP for this wholesaler implies efficient credit management and timely collection of accounts receivable. On the other hand, a prolonged ACP may prompt the business to reassess its credit policies or collection procedures to enhance efficiency and cash flow.

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