A cash discount can also be called an early payment discount or prompt payment discount. Although this article has already defined cash discounts above, understanding the concept involves understanding related terms, as well. Here are three terms you should know:
Discount period | The time a customer is given to pay the invoice and receive the discount before the deadline |
Discount percentage | The percentage amount that can be deducted from the total invoice amount |
Cash discount amount | The price reduction that results once the discount percentage has been applied |
Thirty-day-long payment periods are common in the United States. In some exceptional cases, they can even be up to 60 or 90 days. However, in order to provide customers with a more attractive offer, some suppliers and service providers grant cash discounts. The average discount period is 10 days, and the average discount percentage is around 2 percent.
There are also graduated discount percentages, in which the discount percentage changes depending on the discount period. In brief, a cash discount is the price reduction that is granted when a customer pays their invoice within a limited time period.
The name, cash discount, may be somewhat confusing when it comes to the payment process. Though cash discounts are granted when the payments are made in cash, they are also granted when payments are made via credit transfer, as long as this happens within the discount period. This means that paying in cash is not required in order to receive a cash discount.
Those who have the opportunity to receive a cash discount should use it, because this strategy allows you to save money without any additional expenditures. That being said, if you have a more tax-efficient means to use this cash, you should choose that option, instead.