A company’s average collection period, or ACP, shows the average number of days it takes a company to collect its accounts receivable balance, which is the amount of money a company must collect from customers for sales it made on credit. ACP equals accounts receivable divided by (annual credit sales/365). A lower ACP suggests you collect your receivables quickly. For example, an ACP of 30 suggests you collect your accounts receivable balance every 30 days. You can use the ACP formula to forecast your company’s year-end accounts receivable balance based on your estimated credit sales and ACP.
Estimate your company’s average collection period for next year. This can be equal to your current ACP or it can be lower if you expect to enact stricter collection policies. For example, assume your ACP for the next year will be 45, which means you expect to collect your accounts receivable balance every 45 days on average.
Estimate the amount of credit sales you expect to generate for the next year. For example, assume you will generate $3 million in credit sales next year.
Substitute your estimated values into the ACP equation. Continuing the example, this yields 45 = AR/($3 million/365), in which “AR” represents your year-end accounts receivable.
Divide the amount of credit sales by 365. Then multiply the result by your ACP to solve for “AR” and calculate your estimated year-end accounts receivable balance. For example, divide $3 million by 365, which equals $8,219. Multiply this by 45. This equals $369,855 as your estimated year-end accounts receivable balance.