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On invoice discount example for IT

hi this is tim yoder with fit small business i've been a cpa for 25 years today i'm going to teach you about early payment discounts so to find your early payment discount you need to look at your invoice and find the payment terms so on this example invoice we have terms here of two percent 10 net 30. so what this means is that you get a 2 early payment discount if you pay within 10 days otherwise the entire invoice is due within 30 days some invoices will have the early payment discount subtracted from the total of the invoice at the bottom this particular example does not sometimes they don't so we're going to need to calculate the early payment discount ourselves how do we do that we simply take the two percent times the one thousand dollars subtract that discount then to get the balance due on the invoice so what are some common invoice terms so the first would be 110 net 30. so again it's always the same format so this is a one percent discount if you pay within 10 days otherwise the entire balance is due within 30 days so other common terms we have one percent discount within 15 days two percent discount within 15 days two percent discount within 10 days and so forth right so you could make the early payment discount um whatever you would like so we'll talk a little bit about how you might decide what type of invoice to offer your customers so why would you want to do this what is the benefit to you as a vendor to providing early payment discounts to your customers the main thing is cash flow right cash flow now is much better than cash flow a month from now you would like to encourage your customers to pay as quickly as possible and the question becomes how much of a discount are you willing to give them in order to get them to pay quicker so you need cash now right you need cash to make your payroll you need cash for your day-to-day business expenses you hate to have to borrow cash on the line of credit when you have all of this capital sitting in your accounts receivable right you would like those customers to give you that cash so you don't have to go out and pay to borrow it by offering a early payment discount you can reduce the risk of non-payment as the longer an invoice sits around the more likely it's going to not be paid the customer will forget about the service that was provided it will get buried on their desk something like this by offering them an early payment discount they might write a check immediately the payment the bill gets paid immediately now i'm not saying if something gets buried on somebody's desk they'll never pay it but it might require you to give them a phone call to remind them to pay it and that's not free right you have to pay somebody or your bookkeeper or yourself somebody has to call them and and that's not a fun task debt collection is one of the most uh undesirable bookkeeping tasks so you can avoid a lot of that debt collection by offering a prompt payment discount uh the other benefit is just an increase in working capital in in general right the quicker you can turn over your receivables meaning you issue an invoice you get paid for the invoice the more working capital you're going to have now one benefit of that working capital is that if you have working capital you can actually take advantage of early payment discounts from your vendors right so not only might you be offering early payment discounts to your customers you might be able to take advantage of early payment discounts from your vendor so if your vendors are offering you these discounts and you're not able to take advantage of them you might consider offering your customers invoice discounts so that they pay you quicker you can then take advantage of your early payment discounts okay so what are some of the benefits to your customers obviously they save money right one percent of an invoice may not seem like a lot initially but if they have a lot of invoices that could certainly add up very quickly um it can build their business credit so just by paying paying your bills on time taking advantage of early payment discounts you can build up your credit and also this can certainly build your relationship with the vendor vendors love to be paid early right again they like that working capital so they you have cash for payroll they have cash for taking advantage of their own uh early payment discount so build a great relationship with your vendor so the question then becomes so if i'm going to offer an early payment discount how much do i want to offer generally you want to follow your industry standards so i have a couple years of experience as a bookkeeper in a roofing company so i've also done various other things i've been a cpa for 25 years so i've been in a lot of different areas of accounting but i did spend a couple of really valuable years as a bookkeeper at a roofing company and in the construction industry early payment discounts are very common uh so we had a we had a vendor that was our major roofing supplier and uh you know we had i think it was a one percent uh one percent 10 um discount so we had 10 days to pay it with a 1 discount would have been fantastic unfortunately our customers never paid us fast enough in order for us to take advantage of those and so perhaps if we had been a little bit more aggressive at offering our customers early payment discounts we could have got them to pay us quick enough that we could have then paid our suppliers and taken advantage of that so look at your industry standards building industry construction industry it's very very common to give payment discounts so that's certainly one thing to look at try to stick somewhere near your industry standards maybe a little bit better than your industry standards to give you a competitive advantage so speaking of competitive advantage obviously you want to look at your closest competitors all else being equal if they're giving better discounts than you are customers are going to go to them now maybe you can offer a better product or a better service and you don't have to match their early payment discount but it's something definitely to consider considering your claimant your your customers payment history now this can be a little bit tricky right i would never recommend giving different customers different early payment discounts without justification right so you might have a you might look at different areas of your business perhaps certain like a certain line of your business like going back to being a roofing company perhaps your service department maybe they have a lot of trouble collecting their payable their receivables on time so maybe on service invoice invoices you could offer a early payment discount whereas on new roofs new construction or maybe replacing an entire roof you don't offer your early payment discount there because those customers tend to pay on time or they tend to pay when they can which is when they get reimbursed by their insurance company so you need to look at the situation don't just blindly offer the one percent or whatever discount don't blindly offer the discount to all of your customers look and see which customers is it going to make a difference if the customer in that particular line of business if they already pay on time then you don't want to waste the one percent if it's not going to do any good if it's a line of business where they tend to be a little bit later but they could pay on time you think potentially then perhaps offer the one percent i would avoid just offering discounts haphazardly some to some customers and not other customers without some sort of written policy that outlines how you decide if if discounts are offered just to avoid any possible you know unfair discrimination type of of claims right have it written as to how you decide which customers are offered the discount or perhaps like i talked about the discount might best be offered you know you might vary the discount based on different lines of your business where customers tend to pay differently so if you're processing your invoices manually it can be a lot of work to try to include all of these early payment discounts so i really recommend you use a good bookkeeping software or invoice processing software quickbooks online is a great one most popular accounting software out there again so we can see that their payment terms show up on the invoice and this can be done automatically so let me show you just quickly how to set this up in quickbooks online if you go up to your cogwheel your options cogwheel in the upper right hand corner of the screen and click on that you'll get these different account and settings so if you go to the cell settings cells form content and then down here you need to turn on this discount option once you turn on that discount option you are going to have a terms field pop up anytime you create an invoice when you create an invoice you can set these terms to whatever you like also you can set these terms customer by customer so when you set up a new customer you could give them particular payment terms and then whenever you do an invoice that would be the default that shows up in this box of course you could also change it then if you want for that particular invoice so quickbooks does allow very easily to be able to assign different payment terms to different customers again i would make sure you have some sort of written policy that helps you determine which customers get which terms so that's how early payment discounts work hopefully this will be helpful in allowing you to decide whether you want to to offer early payment discounts to your customers and my name was tim yoder and i hope this was helpful thank you you