The Real Deal – Taking Vendor Cash Discounts

If you’re not taking advantage of vendor cash discounts you may be passing up significant costs savings opportunities. At first glance, cash discounts look like small insignificant amounts, but when you calculate the effective annual interest rate, these can be eye popping numbers.

We’ve put together the Vendor Cash Discount table below that calculates the effective interest rate based on various discounts amounts, days to pay and standard terms.

Cash discount options are often expressed in this way 2/10 Net 30, which means “you can take a 2% dis-count if paid within 10 days, or pay the full amount within 30 days.”

As the chart below shows, there is serious savings when considering cash discounts. Frequently, business owners pass up a cash discount just to hold on to their money for a few more days. Foregoing a 2/10 Net 30 discount option means you just passed up the equivalent of a 36.0% return.

If cash is tight but you have the availability to borrow on your line of credit, it can still pay to take ad-vantage of discount terms if the percentage saved is better than the cost of funds.

If you have a key vendor that doesn’t offer discounts, pick up the phone and ask them. Many businesses are starved for cash and may welcome this offer.

A word of caution, it’s not ALWAYS wise to take a discount. Without proper cash planning a company can get into trouble taking discounts and running into a cash shortage because they depleted their working capital reserves. Planning is the key!

Study the chart below and take advantage of the vendor cash discounts. It’s the “real deal.”

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Todd Rammler

Todd Rammler is the President and founder of Michigan CFO Associates.  Todd is a Certified Management Accountant (CMA), and holds an MS in Accounting from Walsh College (cum laude), and a BBA in Finance from Western Michigan University.

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