By alphacardprocess January 21, 2022
Cash discount programs are designed to offer extra benefits for cash paying customers. They are credit-based incentives that encourage early payment by offering discounts off the purchase total.
Cash discount incentives help your business in two ways: they provide an added benefit for choosing to pay earlier, and they create a sense of urgency for paying off bills promptly.
How Do Cash Discount Programs Work?
Cash discount programs are fairly simple. After placing your order, you will receive an invoice with a stated due date for payment (this is usually the net due date). However, if you pay within X days of receiving your invoice, you will receive Y amount of percentage off the total bill. For example, if the net due date is set at 30 days, and you pay within 10 days of receiving your invoice, you can receive 5% off the total bill.
When structuring cash discount programs for clients, some firms offer “early payment rates,” which allow customers to receive a lower percentage off on bills paid after X number of days. For example, if the “early payment rate” is set at 10 days for 3% off the total bill, customers who pay between day 11 and 20 will receive 1% off (and so on).
Cash discount programs are extremely common. Many firms use them simply to promote early payments for added benefits; other businesses offer discounts in exchange for cash, to reduce their need for working capital.
In fact, discounts are a big part of the product development cycle. In addition to offering extra benefits to customers who pay early, businesses also take a percentage off the bill paid within 30 days – this excludes companies that offer “early payment rates,” obviously. For example, if a firm needs to pay a bill of $10,000, they can offer a 5% discount for bills paid within 10 days ($9,500), or a 10% discount for bills paid within 30 days ($9,000).
Why Offer a Cash Discount Program?
Cash discounts allow clients to receive additional benefits through early payment. This is because, when clients pay early, there is more time for the product to be delivered and sold. For this reason, cash discount programs can provide businesses with a sense of urgency for prompt payments. Clients are aware that they will receive a discount only if they pay early, so in some cases it’s simply a way of motivating customers to fulfill the terms of the contract and pay on time.
Cash discounts reduce a business’ need for working capital. For example, some service providers offer to take a percentage off the bill paid within 30 days; this has two benefits: it reduces the company’s need for working capital, since they do not have to wait 30 days (or longer) to receive their money, and it provides an added incentive to clients who choose to pay within the early payment period.
Businesses can use cash discount programs in a variety of ways. They are designed to motivate customers who want extra perks for paying promptly, while at the same time offering benefits to clients that need or prefer faster access to something they’ve ordered. Some companies choose to use cash discount programs to reduce their need for working capital; others simply do it as a reward for paying early.
The best way to decide whether or not this is an effective strategy for your business is to set up and test a pilot program with a percentage of your clients (I suggest 10%). If the pilot is successful, you can decide whether you want to set up cash discount programs with all of your clients.
What Are the Benefits of Cash Discounts?
Firms that offer cash discounts are able to reduce their need for working capital; in some cases, they can increase access to products and services since they provide incentives for paying early.
When setting up a cash discount program, some companies offer “early payment rates”; this is where the early bird gets the worm. For example, if a business offers 10% off for payments made within 5 days of receiving an invoice (this means that customers will receive 1% off every day after), they can also offer 5% off for early payments.
In some cases, businesses offer other types of discounts for cash payment. For example, a business might say that they will take a 5% discount on all invoices paid after 15 days. This means that clients can receive a total of 1-5% off the invoice if they pay after day 15 (again, this excludes companies that offer “early payment rates,” obviously).
Cash discount programs can also be used to encourage clients that need a sense of urgency for prompt payments. For example, a business might say that invoices paid within five days of receiving an invoice will receive 5% off the total cost of the service. In this case, if a client needs to pay an invoice of $10,000, they can choose to pay it within five days and receive a 5% discount ($9,500).