Discount period

Definition

A discount period is the timeframe within which a buyer can pay an invoice to receive a discount on the total amount due. It incentivizes early payment and helps suppliers manage cash flow more effectively.

5 Must Know Facts For Your Next Test

1. Discount periods typically range from 7 to 15 days.
2. The discount is often expressed in terms such as '2/10, net 30,' meaning a 2% discount if paid within 10 days, otherwise the full amount is due in 30 days.
3. Shortening the cash conversion cycle is one of the main benefits for suppliers offering a discount period.
4. Failure to take advantage of the discount period results in paying the full invoice amount by the final due date.
5. Evaluating the cost-benefit of taking a discount versus utilizing available funds for other investments is crucial for buyers.

Review Questions

• What does '2/10, net 30' signify in terms of a discount period?
• How does offering a discount period benefit suppliers?
• Why might a buyer choose not to take advantage of a discount period?

Related terms

Trade Credit: Short-term credit extended by suppliers allowing buyers to purchase goods and pay later.

Cash Conversion Cycle: The time it takes for a company to convert its investments in inventory into cash flows from sales.

Working Capital: The difference between current assets and current liabilities used to fund day-to-day operations.