In accounts receivable management, the average collection period refers to the amount of time it takes for a creditor to recoup loaned funds. The average collection period is an important component of the cash conversion cycle. Companies with small collection periods tend to have better cash flow and to be more financially solvent. The opposite is true of companies that struggle to collect on their receivables.
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Walking Fine Lines
Creditors face a kind of catch-22 when trying to manage their receivables. Collection practices that are too slow can compromise the entire business with poor cash flow. Practices that are too aggressive run the risk of violating the Fair Debt Collection Practices Act (FDCPA) or running afoul of the Consumer Financial Protection Bureau (CFPB).
Information Is Key
Even though collection practices are highly regulated, creditors still have the right to collect information on their borrowers in advance of accepting credit sales. An effective accounts receivable management practice should keep customer information up to date. This saves time when trying to contact delinquent accounts. It might even prevent the need for more expensive debtor location techniques, such as skip-tracing, down the road.
Simple and Timely Invoices (Average Collection Period)
Creditors should try to make it as easy as possible for their customers and clients to make payments. Some companies send out reminders during the week prior to a contractually due payment date.
Others might provide simple electronic invoices or electronic payment functionality. Debtors are more likely to pay when the process is easy and lacks confusion.
Credit Policy and Credit Terms
Ultimately, each business’s average collection period is reliant on the terms and provisions laid out in the credit contract. If the contract requires that a debtor makes payments every 30 days, then it follows that the average collection period will tend toward 30 days.
If the contract further stipulates that a late fee is not assessed until the account is seven days delinquent, then it is likely that average collection periods will fall between 30 and 37 days.