The average collection period can be used to determine the effect of different collection periods on your business's cash flow. This is best illustrated by the following chart.
|Sales Per Day|
|Investment in Accounts Receivable|
|30||$ 6,000||$ 9,000||$12,000||$15,000||$18,000|
The above chart illustrates the effect that a change in the average
collection might have on the investment in accounts receivable for your
business. Remember, accounts receivable represent money that cannot be used for
other cash outflow purposes. For example, assume that your average sales amount
per day is $300, and that your average collection period is 40 days. Now assume
that you were able to reduce your average collection period from 40 days to 30
days. From the illustration above, you can see that the reduction in the average
collection period reduces the investment in accounts receivable from $12,000 to
$9,000. This reduction generated an additional $3,000 in your cash flow!