AVERAGE SETTLEMENT PERIOD Meaning and
Definition
-
The term "average settlement period" refers to a financial indicator used to measure the average time it takes for a business or company to receive payment for its goods or services. It is commonly used in accounting and financial analysis to assess the efficiency of an organization's cash flow management.
The average settlement period is calculated by dividing the accounts receivable balance by the average daily sales. This calculation helps determine the number of days, on average, it takes for a business to collect payments from its customers or clients.
For example, if a company has an accounts receivable balance of $100,000 and its average daily sales are $10,000, the average settlement period would be 10 days. This means, on average, it takes 10 days for the company to collect payment for its sales.
By measuring the average settlement period, businesses can assess their effectiveness in credit and collection management. A shorter average settlement period indicates a more efficient cash flow management, which is generally considered favorable. It represents timely collections and improved liquidity.
In summary, the average settlement period is a financial metric that helps businesses evaluate the time it takes to receive payment for goods or services. It is calculated by dividing the accounts receivable balance by the average daily sales and is essential in assessing cash flow efficiency and credit management of a company.
