Provide discount for early payment
Discounts, cash discounts and cash refunds describe reductions in invoice amounts for payments. The issuing company sets the terms for a discount. For instance, companies may offer discounts for payments made in advance.
It is critical to control your accounts receivable by incentivizing customers to pay their invoices early. Using it strategically can reduce late fees, save your time, and increase brand loyalty and your overall liquidity.
What's the significance of discounts for early payments?
A cash discount is a form of trade financing that allows businesses to save money on customer invoices by making early payments. In this type of scenario, both parties benefit from the agreement. You’ll receive your earlier and your customer will have to pay less. You see, accounts payable and accounts receivable benefit, and your bottom line is also improved. It will also improve customer relationships.
The advantages of early payment discounts
Aside from customer savings, cash discounts offer many other benefits to vendors and customers. While most customers are usually happy to take advantage of any form of discount, it’ll ensure that the cash flow of your business is uninterrupted.
When you offer customers cash discounts to pay their bills faster, it will provide you with the current funds you need to pay your employees and other regular business obligations. It will also reduce the risk of non-payment or late payment. You’ll spend less time tracking down customers’ unpaid invoices by giving your customers a reason to pay sooner. The longer you wait to pay, the more things can happen that prevent buyers from fulfilling their obligations. That’s why you need to ensure they pay as soon as possible.
Early payment discounts are a great way to shorten the time between issuing invoices to customers and receiving payment. You will improve working capital and close cash flow gaps in the long run. This way, your cash flow will remain positive
What are the disadvantages of early payment discounts?
No doubt, providing an early payment discount can occasionally be advantageous. However, there are a few drawbacks that you’ll want to consider;
Reduced profit margins
Offering a slight discount can reduce your profit margin and leave you with little to no profit. These effects are more detrimental if you have a low markup on your goods and services. Make sure to consider any potential future early payment price reductions when establishing the initial price for the services.
Clients wait till the end of the payment period and still enjoy the discount
This is a common situation that most business owners find themselves in. The consumer accepts the early payment incentive offered but waits until the due dates to make their payment. If this frequently occurs in your company, it could be advisable to look into alternative methods of rewarding loyal clients and do away with the early payment incentive.
It can be pretty time-consuming to manage and account for early payment discounts, especially if you’re using a manual accounting system to keep track of business transactions. It can also be tough when using an automated system. You’ll get to decide whether it’s worthwhile as a business owner.
How to prevent potential cash discount problems
When introducing early payment discounts, especially for the first time, it’s common to run into some problems. To deal with these problems, all invoices must clearly explain the terms for a cash discount. Also, payments must typically reach the client within the predetermined number of days following the invoice date to be eligible for a cash discount. If you feel that customers will be able to process payments faster through a particular medium or means of payment, you can state that the discount will only be available to those who use it.