Average Collection Period – The smaller the number the better (Typically < 45 days is excellent).
Days Sales Outstanding (DSO) is another name this ratio is also known as.
This is one of the Liquidity Ratios which lets you know if a company is able to pay its debt. It helps answer the question “Can the company pay its bills?”
Calculate this ratio using the below equation. Values in the equation can be acquired from the Balance Sheet.
Equation:
Average Collection Period = (Accounts receivable) ÷ (Daily credit sales) = Days
Equation results indicate the average number of days it take a firm to convert its accounts receivable into cash.