Enter the unpaid invoices (accounts receivable balance or, ideally, average accounts receivable) and the net credit sales for a year (or annualized) into the calculator to estimate the average collection period (often referred to as an “average credit period”).
Related Calculators
- Prorated Charges Calculator
- Prorate Factor Calculator
- Net Collection Rate Calculator
- Average Sales Calculator
- All Business Calculators
Credit Period Formula
The following formula is used to estimate the average collection period (often called the “average credit period” or Days Sales Outstanding (DSO)) when you have accounts receivable and annual net credit sales.
CP = 365 * (UI / SR)
- Where CP is the average collection period (days)
- UI is unpaid invoices / accounts receivable for the period (often the ending balance, but ideally the average accounts receivable) ($)
- SR is net credit sales for the period (typically stated on an annual basis when using 365) ($)
To calculate the average collection period, divide accounts receivable (unpaid invoices) by net credit sales, then multiply the result by 365 (days). Note: if you want a different time window (e.g., a quarter), the multiplier should be the number of days in that period.
What is a credit period?
A credit period can refer to two related ideas:
1) Contractual credit terms (such as “Net 30”): the agreed amount of time a buyer is allowed to pay for a purchase after the invoice date.
2) Average credit period / average collection period (DSO): an accounting metric that estimates how many days, on average, it takes a business to collect its receivables. This calculator estimates this second meaning using receivables and (credit) sales.
How to calculate credit period?
Example Problem:
The following example outlines how to calculate an average collection period (average credit period / DSO).
First, determine the unpaid invoices (accounts receivable). In this example, there are $20,000.00 in unpaid invoices (AR).
Next, determine the net credit sales for the same time basis. In this example, net credit sales for the year are $250,000.00.
Finally, calculate the average collection period using the formula above:
CP = 365 * (UI / SR)
CP = 365 * (20,000 / 250,000)
CP = 29.2 days
FAQ
What factors can affect the length of a credit period?
For contractual terms (e.g., Net 30), the credit period can be influenced by industry standards, the relationship between buyer and seller, the buyer’s creditworthiness, and the seller’s policies. For the average collection period (DSO), those factors plus billing processes, disputes/returns, and collection effectiveness can affect how quickly receivables are collected.
How does a longer credit period affect a company’s cash flow?
A longer period before customers pay (whether due to longer credit terms or slower collections) can negatively affect cash flow by delaying the receipt of cash from sales. This might require the company to have sufficient working capital to cover operating costs while waiting for payments. However, offering longer terms can also increase sales volume by making purchasing more attractive for buyers.
Can a company change its credit period for different customers?
Yes, companies often adjust credit terms based on the customer’s history, creditworthiness, and the volume of purchases. High-volume or long-standing customers with a good payment record might be offered longer terms as a sign of trust and to encourage further business.
