The length of time it takes for a business to receive payments owed by its customers is determined through a financial metric. This metric is derived by dividing the number of days in a year by a ratio that indicates how efficiently a company collects its receivables. The resulting figure represents the average number of days between a credit sale and the actual receipt of cash.
Understanding this duration is crucial for effective working capital management. A shorter duration suggests efficient credit and collection policies, while a longer duration may indicate issues with these policies, potentially tying up working capital and affecting cash flow. Historically, businesses have monitored this period to gauge financial health and refine strategies for managing customer credit and payment terms.