What is the Meaning of a Low or High Average Collection Period?

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What is the Meaning of a Low or High Average Collection Period?
Jill, USA
Most firms allow their customers to purchase goods or services via credit. There is nothing wrong with this business practice. But one problem with allowing to buy on credit is there are risks and costs associated with doing so. In indivudual cases you don't always know if and when a customer will make cash payments.
Possessing a low average collection period (compared to industry benchmark) is normally a positive sign, because it means that it does not take the company very long to turn its receivables into cash.
A relatively high average collection period (compared to industry average) may indicate:
1. Poor credit decisions,
2. High profit levels,
3. Slow / poor collection of accounts receivables,
4. Low liquidity levels.



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