Settlement discount v 30 days credit

U

upgrader

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Hello,

Can someone show me with a clear example that it is better to give settlement discount of 3% every month versus giving 30 days credit and paying interest of say 5%.
If possible please show 10k payment every month.

Thanks
 
Will your mark up margin not be the biggest factor here? I remember reading up on this for a thesis years ago and from memory (very hazy), the consensus was that discounts are a bad idea and should be avoided if possible.
 
Not sure if I've read it right because it seems to be such an obviously bad deal - are you asking for an example showing that a cost 3% a month is lower than 5% a year? Taking the example as written, a discount of 3% on your €10,000 due means you get €9,700 (i.e. a cost of €300). Having to borrow the €10,000 for a month at 5% per annum would cost you about €41. So if you're sure of getting your €10,000 at the end of the month (i.e. you don't need to build in a risk discount for the possibility of not getting paid), then the settlement discount seems like a poor deal for the person owed the money.
 
Hi Rainyday,

It is a practical issue,I want to know how much settlement discount can be given so there is break-even or better,my overdraft is at 6.1%.
I incorrectly thought that by giving customers a 3% discount to pay 30 days earlier would be better than paying overdraft interest of 5.1%,of course I should have known that 6.1% was per year but the settlement discount would be every month.

Now I am asking where is the break-even between settlement discount v giving an extra 30 days credit? Is there a spreadsheet or template around or by using an example of 10k (of sales) pm.

On a broader view,why give settlement discount

Thanks
 
upgrader said:
On a broader view,why give settlement discount
Click to expand...

Why indeed? It rarely makes sense to concede, say, 3% of your annual turnover to save on overdraft interest - unless of course your interest cost is a sizeable proportion of your turnover, in which case your business may not be viable in the first instance.
 
upgrader said:
Hi Rainyday,

It is a practical issue,I want to know how much settlement discount can be given so there is break-even or better,my overdraft is at 6.1%.
I incorrectly thought that by giving customers a 3% discount to pay 30 days earlier would be better than paying overdraft interest of 5.1%,of course I should have known that 6.1% was per year but the settlement discount would be every month.

Now I am asking where is the break-even between settlement discount v giving an extra 30 days credit? Is there a spreadsheet or template around or by using an example of 10k (of sales) pm.

On a broader view,why give settlement discount

Thanks
Click to expand...

6.1% a year is about half of one percent per month.
 
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