A collection period is the average number of days required to collect receivables from customers. It is measured as the interval from the issuance of an invoice to the receipt of cash from the customer.
A shorter collection period is considered optimal, since the creditor entity has its funds at risk for a shorter period of time, and also needs less working capital to run the business. However, some entities deliberately allow a longer collection period in order to expand their sales to customers having lower credit quality.
The collection period calculation does not include the collection period for non-trade receivables, such as advances to employees, since doing so would skew the result of the calculation.