What Is An Early Payment Discount?

For enterprises with tight cash flows, paying an invoice early may not always be possible. If you’re looking for ways to help cash flow while rewarding your customers, consider offering an early payment discount. Used as an incentive to get your customers to open their wallets a little sooner, an early payment discount may be a good option for your small business. As an incentive for payment, business owners may want to consider offering an early payment discount to their customers. Find out the advantages and disadvantages of offering early payment discounts. If your customer has a credit balance then you need to inform them so that they can take the credit against a future invoice. You should email them a copy of the credit memo and that way they can reference it along with their payment.

QuickBooks makes it easy to create invoices that include early payment discounts. You can save different payment terms for each customer, so they’ll auto-populate when you draft an invoice. By creating payment terms for each customer, QuickBooks can alert you when a customer’s invoice is coming due. With this information, you can send customers a friendly payment reminder which can incentivize them to make the payment prior to the due date. This means the customer receives a 2% cash discount if the invoice is paid within 15 days. If the invoice is not paid within 15 days, then it is due in 30 days with no discount.

A discount of 1% in 10 days on 30-day payment terms is 1/10 net 30, and so on for other types of payment terms. Unlike quick discounts, which are offered at the time of sale and usually involve a cash purchase, an early payment discount is part of the terms that have been agreed upon by you and your customer. Any customer that you sell to on credit should have credit terms assigned to them in your accounting software application, which serve as an informal agreement between you and them. To return to the example of 2/10 net 30 terms, if the buyer pays the invoice within 11 days instead of within 10 days, they will not be able to access any discount at all.

A savings of $2,400 doesn’t seem like much on its face, but capturing early payment discounts on multiple invoices can add up quickly over the course of a year. The traditional investment vehicles that treasury would use offer less return by far than an early payment discount. Consider that, as of December 18, the highest potential return on a money market account was 1.05% APY, the 6-month LIBOR has a return of 0.34%, and the overnight rate is 0.03%. None of these even approach the 36.73% risk-free annualized rate of return that an early payment discount provides. Suppliers that offer early payment discounts benefit from receiving payment sooner, which increases their working capital stores and decreases DSO. If you’re taking an early payment discount, pay the invoice before its due date.

• This most commonly happens when the customer pays slightly outside the time frame to earn the early payment discount, but they reduce their payment by the discounted amount anyway.
• If your competitors aren’t offering early payment discounts and customers are use to paying net 30, net 45 or net 90, it might be a hard sell getting them to pay within 10 or 15 days.
• Offering early payment discounts can increase customer goodwill, but it can also cause friction if customers take discounts they haven’t earned.
• Any purchase order and vendor invoice should always show the payment terms.
• As a customer, your company decides whether to take an early payment discount or pay a bill on/after the due date.
• Early payment terms are much shorter than the number of days in a standard payment cycle.

This won’t be a problem if your company has high profit margins. statement of retained earnings example However, it can be a problem if your company has tight margins.

Barbara is currently a financial writer working with successful B2B businesses, including SaaS companies. She is a former CFO for fast-growing tech companies and has Deloitte audit experience. Barbara has an MBA Certified Public Accountant degree from The University of Texas and an active CPA license. When she’s not writing, Barbara likes to research public companies and play social games including Texas hold ‘em poker, bridge, and Mah Jongg.

Notice that the drop-down lists include both a Vendor list and Terms list. This gives you a choice of vendors and payment terms (including 2% 10, Net 30) that you’ve already entered into the QuickBooks accounting software. These are usually given as a percentage of the total invoice amount before any sales tax. Suppliers offer an early payment discount to customers when they want to collect their accounts receivable quickly.

Types Of Early Payment Discounts

Finally, many vendors and suppliers feel that early payment discount programs are good for marketing – especially toward cash-heavy customers. Offering a discount is always a solid marketing and sales move. So an early payment discount of 2/10 net 30 means that the customer can deduct 2% from the total vendor invoice amount if paid within 10 days of the invoice date. If the payment is not made within the first 10 days the customer must pay the full amount before the 30th day. An early payment discount – sometimes called prompt payment discount or a cash discount – is when a vendor offers a discount to a customer if the invoice is paid before the due date. Early payment discounts can help improve a vendor’s cashflow while also pleasing customers. This assumes the environment is right for shorter, outstanding invoice terms.

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If no one else is offering early payment discounts, consider whether or not doing so will give you a competitive advantage. Although the advantages are compelling, there are some risks and downsides to offering discounts to your customers for paying early. You can choose which customers are offered an early payment discount. Unlike sales and special offers that usually must be offered to all customers, you can choose which customers you offer an early payment discount to. In other words, you can reward your best customers for doing business with you by giving them a chance to save money on every purchase they make from you. If a customer’s primary goal is to reduce cost of goods sold, then early payment discounts help. A 2% discount on a $100,000 invoice means $2,000 in savings, improving the company’s bottom line.

On The Fence About Offering Payment Discounts?

In general, https://www.bookstime.com/ are suppose to be paid within a short period of time (i.e. 10 days of the invoice date). This means the customer receives a 1% cash discount if payment is submitted within 15 days. If the customer does not pay within 15 days, then the invoice is due in 30 days with no discount.

Unfortunately, getting your hands on that cash is not easy, especially when you’re talking about collecting the money owed to you from customers. There are many ways to improve cash flow by focusing on improving invoice collection metrics, but today we’re going to focus on one specific tactic, early payment discounts. It can also lead to some challenges, including a loss of profitability and administrative burdens. Although not all of your customers will take advantage of early payment discounts, some will, and those discounts will impact your bottom line. You must weigh the benefit of getting paid sooner and improving your cash flow against the loss of profit you will experience by offering the discount. Speeding up collections is the primary reason most businesses offer early payment discounts to their customers. Customers with good cash flow often take advantage of early payment discounts to save some money—improving their bottom line.

When To Record Early Payment Discounts

One advantage of invoice factoring over offering early payment discounts is cash predictability. Factoring your receivables provides you predictable cash flow, which is extremely important for new and growing companies.

For example, a customer may agree to your 1/10/30 terms (that’s a 1% discount in 10 days on an invoice that is due in 30 days) but still remain slow to pay you. You can protect against this by being selective and you can even put an early payment clause in the contract. Your accountant or bookkeeper can also help you set up your accounting software to streamline the administration of early payment discounts should you decide to offer this benefit to your customers. Does your business provide critical products or services customers cannot easily obtain elsewhere? If your business is critical to a supply chain, and if you don’t have much competition, you can likely require more favorable payment terms—like net 10 or net 15—from your customers. Net 10 or net 15 terms indicate your customers are expected to pay their full invoices within 10 to 15 days of the invoice date… the typical window for an early payment discount.

Usually, the customer and the vendor have different views as to when the clock starts ticking for receiving payment. The customer will start the clock when their accounts payable department receives the invoice while the vendor will start counting on the date of the invoice. Clearing up this issue ahead of time will avoid problems later on. Like QuickBooks, you can create early payment discounts in FreshBooks. You can customize payment terms and apply them to all customers or select specific customers. When you create an invoice for a customer, the payment terms will automatically populate based on the initial setup. However, you can change the payment terms for specific invoices if they differ from the standard payment terms for a customer.

The Advantages Of Early Payment Discounts For Your Business

In addition, origination fees and minimum factoring fees may be tacked on. The terms is retained earnings a debit or credit of an early payment discount should be in writing to prevent any problems.

Any purchase order and vendor invoice should always show the payment terms. There are a lot of really good reasons to give your customers an early payment discount, particularly if you’re looking to expand your business or need to increase your cash flow. But look out for the downsides, which may end up costing you more than you receive in return. Getting customers to fulfill their payment liabilities can be like pulling teeth.

There’s no “wrong” way to offer an early payment discount, but remember the goal here is to encourage your customer to pay you earlier than you would normally expect to be paid. Offering early payment discounts can increase customer goodwill, but it can also cause friction if customers take discounts they haven’t earned. This most commonly happens when the customer pays slightly outside the time frame to earn the early payment discount, but they reduce their payment by the discounted amount anyway. If your competitors aren’t offering early payment discounts and customers are use to paying net 30, net 45 or net 90, it might be a hard sell getting them to pay within 10 or 15 days. Early payment terms are much shorter than the number of days in a standard payment cycle. As a customer, your company decides whether to take an early payment discount or pay a bill on/after the due date.

This means that the client has the option to pay on their usual net-30 day terms at any time, without the discount. Many small business owners don’t spend a lot of time tracking invoices and payments – unless they need they money. If you implement this plan, you must track cash flows carefully. Otherwise, you could end up mistakenly giving discounts to companies that claim that are paying sooner, but aren’t. Some businesses offer variations on the 2/10 net 30 and 2/15 net 30 early payment discounts.

How To Apply Early Payment Discount On A Vendor Bill

The advantage is you don’t have to discount the invoice in order to compel them to pay their invoices this quickly. Early payment discounts can be a good way to speed up collections in your business and improve your cash flow. But they have to be used correctly, and they aren’t right for every business. If you aren’t careful, early payment discounts can cost you not only money but also relationships with your customers. Some businesses offer early payment discounts as a way to reward their customers for paying their bills before they are due. You might have heard of this strategy—and you might have taken advantage of it yourself as a customer—but you might still be confused about whether this is a good strategy for your business. Early payment discounts, while valuable and mostly risk-free ways to grow enterprise cash, aren’t perfect for every enterprise.

Similar to the 2/10 – net 30 contra asset account, this type of early payment discount is ideal for jobs that require you to spend a large amount of cash up front. For suppliers, these options provide the benefits of early payment and improved cash flow without the high costs associated with early payment discounts. These programs also improve cash flow for buyers and provide access to large sums of working capital.

First, get the vendor bill into the QuickBooks Online system, either automatically or by manually entering it. Our priority at The Blueprint is helping businesses find the best solutions to improve their bottom lines and make owners smarter, happier, and richer.

With others, you need to send multiple payment requests after the deadline has passed. If your business needs cash, consider offering an early payment discount.

For example, a company who has a 10% profit margin and offers a 2% discount for early payment is giving up twenty percent of its profit! So before you start using this as a tactic to improve cash flow, be sure to carefully look over your financials to make sure you can afford to do so.