What characterizes settlement (prompt payment) discounts?

Settlement or prompt payment discounts are specifically designed to encourage customers to pay their invoices earlier than the normal terms agreed upon. This type of discount serves as an incentive for businesses to maintain positive cash flow by receiving payments more quickly. By providing a reduced price for earlier payments, businesses can effectively improve their liquidity and reduce the risks associated with outstanding receivables.

In contrast, discounts offered only for bulk purchases typically relate to volume incentives rather than payment timing. Discounts provided if payment is made within agreed terms do not denote an incentive for early payment but rather link to the established payment timeline. Lastly, discounts that can be availed only after one month of purchase do not align with the primary purpose of a settlement discount, which focuses on immediate payment incentives rather than delays. Thus, the rationale for choosing a reduced price as an inducement for earlier payment underlines the very essence of settlement discounts.