Cash Discounts

Are an inducement offered to the buyer to encourage payment of a bill within a specified period of time. They tend to narrow the gap between the time of sale and the time of  collection, which can become a source of cash flow difficulties for the seller. Cash discounts are referred to as terms and may appear on a bill as 2/10, net 30, where

  2 = the percent of the discount
10 = number of days within which the buyer must pay in order to qualify for the discount net
30 = number of days at which payment must be made in full

Example 1
An invoice of $500, dated March 6, has terms of 2/10, net 30. If payment is made on March 16, the net amount is:

1. $500 X 2% = $10 discount
2. $500 - $10 = 490

If payment is made on March 17, the entire $500 is due.

Some companies offer a varied cash discount depending on when payment is made--for example, 2/10, 1/20, net 30. This means that the company offers a 2 percent discount if the buyer pays within 10 days; if he or she pays after 10 days, but within 20 days of purchase, he or she gets a 1 percent discount; the net amount is due within 30 days.

Example 2
A $750 invoice dated April 6 has terms of 3/10, 2/15, net 30. If paid by April 16, the discount will be $22.50. If the invoice is paid after April 16, but by April 21, the discount will be $15. The entire bill of $750 must be paid by May 6.

Although in most cases the cash discount period is computed from the "invoice" or purchase date, the date may also be computed from either the date of receipt of the goods (ROG) or starting with the end of the month (EOM).

ROG is used primarily when there is a significant gap between the date of the sale and the delivery date. This eliminates the necessity for the buyer to pay for goods before receiving them in order to get a discount.

EOM is used primarily as a convenience with traditional end-of-month billing practices followed by most companies.

Example 3
The last date on which a discount can be taken is shown below:

                                 Invoice       Goods                                      Last Day on Which
                                   Date      Received        Terms                 Discount Can Be Taken
Invoice $600            Oct. 3       Oct. 8       2/10, n/30 ROG             Oct. 18
Invoice $750            Oct. 3       Oct. 8       2/10, n/30 EOM            Nov. 10*
*10 days after the end of month (EOM).