The average collection period (or days sales outstanding) measures the average number of days it takes to collect payment from customers after a sale is made.
The average collection period is calculated as (Accounts Receivable / Total Credit Sales) x 365 days. It tells you how long, on average, your money is tied up in receivables before being collected. A shorter collection period means faster cash conversion and better cash flow. For example, if your average collection period is 45 days but your payment terms are net 30, your customers are paying 15 days late on average. This metric should be monitored monthly and compared against your stated payment terms. An increasing collection period indicates deteriorating payment behaviour that needs attention - whether through improved invoicing practices, follow-up procedures or credit policies. Industry benchmarks vary: professional services might average 40-60 days while retail is typically 0-5 days. SortBooks tracks your average collection period in real-time and alerts you when it exceeds your target or shows a deteriorating trend.
SortBooks automates the bookkeeping processes related to average collection period by connecting to your Xero account and using AI to categorise transactions, reconcile bank feeds and generate accurate reports. Instead of manually managing average collection period, SortBooks handles it automatically with 97%+ accuracy - saving you hours every week and ensuring your books are always up to date and compliant.
Accounts receivable (AR) is the money owed to your business by customers who have purchased goods or services on credit. It is a current asset on your balance sheet.
An ageing report categorises accounts receivable or accounts payable by the length of time invoices have been outstanding, typically in 30-day buckets (current, 30, 60, 90+ days).
Cash flow is the movement of money in and out of your business. Positive cash flow means more money coming in than going out. It is often considered more important than profit for business survival.
Payment terms specify when payment is expected from a customer. Common terms include payment on receipt, net 7, net 14 and net 30 (meaning payment due within that many days).
Working capital is the difference between current assets and current liabilities. It measures the short-term financial health and operational efficiency of your business.
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