A tool for determining the average number of days it takes a business to collect payment after a sale is made on credit. This metric is calculated by dividing the average accounts receivable balance during a specific period by the total credit sales during the same period and multiplying the result by the number of days in that period. For example, a company with average accounts receivable of $50,000, credit sales of $200,000 over a 90-day period would have a metric of 22.5 days.
This metric provides valuable insights into the efficiency of a company’s collections process. A lower number generally indicates efficient collections and positive cash flow, while a higher number can suggest potential issues with credit policies, customer relationships, or operational bottlenecks. Tracking this figure over time can reveal trends and inform strategic decisions related to credit terms, customer segmentation, and resource allocation. Its historical evolution reflects the increasing emphasis on working capital management and financial efficiency in modern business.