Accelerating customer payments with an early payment discount reduces your exposure to bad debts . While customers taking advantage of the discount are unlikely to default , your exposure to them will still be less than if they were paying slower - good paying companies do occasionally end up bankrupt . always a good solution for all businesses . A few things you may want to consider before making the commitment :
CREDIT MANAGEMENT
Drive Prompt Payments Using Early Payment Discounts
By Wasilwa Miriongi
The world economy is facing a downturn due to the events happening in the political scene like war in Ukraine . It is also uncertain how long the Kenyan economy will remain in a relative state of hibernation . In these difficult times , working capital management is a key priority on any credit manager ’ s agenda to ensure that the procure-topayment process remains intact , whilst simultaneously preserving cash to respond to market changes and take advantage of growth opportunities . It goes without saying that early payment discounts are simply one lever within working capital management that you can leverage on .
Many firms offer early payment discounts as part of their terms of sale . Whether you should or not depends on the competitive conditions facing your firm as well as the benefits and costs your firm will realize from offering discount terms . The benefits accrue from the volume of accelerated payments you can realize and the costs that result given your capital structure .
An early pay discount provides your customers with the option of paying invoices by the discount date or by the due date . Discounts typically range from half a percent to 2 percent . Discount dates are usually set for 10 to 15 days after the invoice date , though sometimes longer when the due date is beyond 30 days . Due dates typically range from 30 to 90 days .
A payment discount , also known as ‘ discounts for prompt payment ,’ can be a great way to get invoices paid faster and improve your debtor ’ s process . However , these discounts should not be offered indiscriminately - they need to be carefully calculated and implemented in order for them to work effectively .
There is some debate on whether they should be standard practice in order to incentivize customers to pay early , or whether they should be used as a last resort measure when other methods of collection have failed .
Should You Offer an Early Payment Discount ?
Although it seems a great idea in some cases , offering early payment discounts is not
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Accelerating customer payments with an early payment discount reduces your exposure to bad debts . While customers taking advantage of the discount are unlikely to default , your exposure to them will still be less than if they were paying slower - good paying companies do occasionally end up bankrupt . always a good solution for all businesses . A few things you may want to consider before making the commitment :
• What is your current profit margin ? If your profit margin is thin , offering a discount to your customers may be counterproductive . Yes you will get paid earlier but at less of a markup .
• Do you need to improve your cash flow ? If cash flow is tight in your business , offering customers an early payment discount may be one way to improve it .
• What is the competition doing ? If the majority of your competitors are offering discounts to their customers , it might be a good idea if you did as well .
Do you spend a lot of time following up with your customers ? If the majority of your customers pay late , offering an early payment discount may encourage them to pay you a little earlier . But don ’ t count on it .
There are a few different types of early payment discounts , but the most common are volume and time-based discounts . Volume discounts offer customers lower prices for making larger payments upfront , while time-based discounts offer customers a reduced price if they pay within a certain number of days or weeks from when the invoice is issued .
Time-based discounts are the most common , as they encourage customers to pay quickly by giving them a financial incentive to do so . It is important to make sure the time-based discount is long enough that customers have time to actually pay their invoice , but also short enough that you do not lose out on too much revenue by giving the discount .
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