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In the business world, credit purchases play a vital role in accelerating commercial activity, increasing sales, and
enhancing customer relationships. It allows customers to buy products even before they have the funding to
pay for them, making it easier for businesses to expand their buyer base and achieve their sales objectives.
However, the credit period is an essential aspect of credit purchases that enterprises should consider before
extending credit to their customers. In this article, we will discuss what credit period is, its importance in
business, and how to calculate it.
READ: How Do Small Business Owners Currently Handle Their Business Finances &
What Is Their Process?
Enhancing Sales:
Extending the credit period can help raise sales and expand the buyer base, assisting the company in meeting
its sales objective. Credit period: key for buyer’s creditworthiness and future transactions in business.
Customer Relationships:
Credit Period = Average Accounts Receivable / (Net Credit Sales / Credit Days), or The Credit Period formula can
be expressed as Credit Days divided by Receivables Turnover Ratio.
he average receivables are determined by adding the beginning and ending balances of the company’s
accounts receivable and dividing the net result by two. Net credit sales refer to the sum of the company’s
earnings from net credit sales that occurred during the consideration period. The calculation takes into account
the total number of days during a particular period, assuming 365 days per year. Finally, the receivable turnover
ratio is determined by dividing the company’s net credit sales by its average accounts receivable.
The collection period refers to the timeframe a creditor or seller must wait to get payment from a buyer or
debtor. The duration of the collection period in a business may vary depending on when the customer makes
their payment, which could result in a shorter or longer credit period. However, if a business operates on a cash-
on-delivery basis, there are no credit or collection periods involved in the transaction.
The discount period acts as a motivation to encourage clients to make early payments. Early payment, big
savings. Smaket simplifies your billing. These business terms facilitate prompt payment by
debtors, making it easier for the company to receive payments quickly.
READ: What's Credit Control & Who Can Use Credit Control?
Conclusion:
In conclusion, the credit period is a crucial aspect of credit purchases that businesses should consider before
extending credit to their customers. Extending the credit period too much can negatively impact a company’s
working capital cycle, while too little credit period may not be appropriate for the debtors’ turnover ratio of the
organization.
FAQ:
1. What is a credit period in business?
A credit period is the length of time given to a customer by a business to pay for the goods or services they
have purchased. It is a crucial part of the payment terms between businesses and their customers.
The credit period is important for a business because it can impact their cash flow and overall financial health.
Longer credit periods = more customers, but can lead to delayed payments & cash flow issues.
Credit periods vary based on industry, customer history, and risk of non-payment.
Offering a credit period can help businesses attract more customers and also increase sales. It can also help
build customer loyalty and relationships, and improve the overall customer experience.
5. What are some best practices for managing a credit period in business?
Effective credit management: clear terms, communication, and also follow-up for on-time payments. Optimize
finances with software/pro help for credit & also financial management.
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