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Calculate and apply a cash discount
Temps de lecture : 5 minutes
Cash discounting allows savings of up to 2% on commercial transactions, optimizing companies' cash flow management.
Sommaire
- Cash discount: definition
- How do you calculate a trade discount?
- Why offer customers a discount?
- What discount rate should you apply to your customers?
- How is the discount accounted for?
- Other legal and tax obligations with a discount
- Trade terms not to be confused with each other
- Advantages and disadvantages of commercial discounting
- What's the alternative to commercial discounting?
- Frequently asked questions :
Cash discount: definition
Discount for cash payment is a form of commercial discount offered by companies to their customers in exchange a immediate or advance payment . This practice, non-mandatory but an incentive is used to accelerate cash flow and reduce payment times.
This also helps to ensure sales recovery and avoid any unpaid invoices.
Although mainly applied to cash payments, discounts can also be applied to prepayments.
What is a cash payment?
Le cash payment refers to a transaction where payment is made immediately upon purchase. t or delivery.
Unlike deferred or instalment payments, Cash payment requires the customer to pay the full amount due without delay. offering immediate liquidity to the company.
What is prepayment?
Le prepayment for its part, involves a payment made before receipt of goods or services . This method is often used in commercial transactions for securing an order .
Prepayment can also be combined with benefits like reductions or discounts This encourages customers to pay in advance.
It is most often used with small, young customers, with whom trust has not yet been established.
How do you calculate a trade discount?
Calculating a trade discount involves define a discount percentage on the total amount of an invoice applicable if the customer pays before a specified date.
Suppose a company offers a 2% discount for u n payment within 10 days on a 1 000 €. If the customer pays within this period it benefits from a 20 discount (2% of €1,000), paying only 980 € .
Why offer customers a discount?
Offering a discount for early payment is beneficial for companies, as it accelerates cash flow et reduces the risk of late payment or non-payment .
For the customer, it's a direct savings on your bill .
What discount rate should you apply to your customers?
Un reasonable discount rate is around 1 % . Offer a 2% higher rate may seem attractive to customers, but it represents a high financing costs for the company .
If you offer 2% discount for immediate payment instead of 30 days this is equivalent to finance your sales at high rates .
If this cycle repeats itself every month, you will would actually finance your sales at an annual rate of 27%. (applying a compound monthly interest rate : 1,02^12 - 1 ). This means that the company pays 27% annual interest on the discounted amounts This can have a significant impact on profitability.
How is the discount accounted for?
In accounting terms, the discount granted is recorded as a reduction in sales . For example, if a discount of €100 is granted, this amount will be deducted from total sales.
Other legal and tax obligations with a discount
VAT on trade discounts
VAT must be adjusted accordingly when a discount is applied . If a discount reduces the taxable amount, VAT must be calculated on this reduced amount.
Does the discount have to appear on the invoice?
Oui the discount and its conditions must be clearly indicated on the invoice to guarantee transparence and enable accounting follow-up suitable.
Is discounting mandatory?
Cash discount is not a legal obligation but rather a commercial option offered by the seller .
The companies are free to offer discounts or not and they can decide the conditions under which these discounts apply. Customers, for their part, have the choice of accepting or refusing the proposed discount.
Trade terms not to be confused with each other
What's the difference between a deposit and a discount?
A deposit is a partial payment made in advance of an order, while a discount is a reduction granted for early or prompt payment.
The difference between a discount and a rebate
A rebate is a reduction on the selling price, often linked to the quantity purchased or to a promotion, while a discount is a reduction to reward prompt payment.
What's the difference between discounting and trade discounting?
Although similar, the reduction is generally used to encourage a new business transaction, while the discount is specifically linked to payment terms.
What's the difference between a rebate and a discount?
A rebate is often granted after the purchase based on volume or customer loyalty, while a discount is linked to speed of payment.
Advantages and disadvantages of commercial discounting
| Benefits | Disadvantages |
|---|---|
| Improves company cash flow Reduces the risk of late payment and non-payment Can build customer loyalty through cost savings | Reduces sales Can lead to customer dependence on discounting Requires rigorous accounting follow-up |
What's the alternative to commercial discounting?
When a company wants to encourage rapid payment without necessarily offer a discount several alternatives are available.
The most effective option is to use financing solutions as factoring or the cash flow financing .
Hero Cash for example, is a modern factoring service that enables companies to receive prompt payment of their bills . This system offers you immediate cash flow by advancing invoices owed by your customers. For their part, your customers can pay in instalments or deferred payment.
Request a customized quoteFrequently asked questions :
Can I refuse a cash discount?
As a customer, you can't prevent your supplier from including a discount policy in the T&Cs and on invoices. However, we are under no obligation to pay cash: only the payment deadline must be respected.
What's the difference between a bank discount and a trade discount?
A bank discount is a cash advance granted by a bank against bills of exchange (debt instruments), while a trade discount is a discount offered by a supplier for early payment of an invoice.
What is the legal payment period between two professionals?
The legal payment period between two companies is generally 30 days after receipt of goods or services, unless otherwise agreed between the parties.
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