Accelerate Payments – Create Revenue – Avoid Losses
No doubt you’re familiar with the early payment discount used by your company’s accounts payable department in response to a supplier’s request. But you can also use this tool to improve the status of your accounts receivable. Offering the right customers an early payment discount is a well-documented strategy that can help you improve cash flow, lower your risk of bad debt, and in many cases actually generate a profit.
What makes this type of discount such a powerful tool is that it creates an incentive that makes your customers willing to do something that generates significant benefits for you: pay their invoices early. While the rationale behind each tactic is slightly different, the net effect is the same: an improved financial picture for your business. In return for a modest discount, your customers will literally help you solve some of your most pressing business challenges — and do so willingly.
What Is “Early Payment Discount”?
“Early Payment Discount” refers to a percentage of the balance due that a vendor, supplier, or service provider allows a customer to deduct from the amount owed if the bill is paid within a specific number of days, rather than waiting for the payment’s normal due date. For example, your business might offer a 1-percent discount to a customer who pays within 10 days instead of waiting until closer to the 30-day payment due date. This would be a nominal cost in exchange for faster cash when you need it.
Strategy 1: Early Payment Discount for Payment Acceleration
If your company has an unforeseen expense or a bill that’s coming due and the funds to pay it aren’t available, offering an early payment discount to a client who has a consistent payment history but who generally pays closer to the invoice due date can help you meet this sporadic cash requirement.
At Stevens & Ricci, our Payment Discount Guide and spreadsheet provide the early payment discount formula that will help you calculate how much of a discount to offer your customer based on the financial cost of providing the discount. (We explain how to calculate the “cost” of the discount in our free Early Payment Discount Guide. Your cost will rise and fall as you plug in different percentages and compare the results to your “break-even” discount.) In some cases — i.e. when interest rates are high — you may even find that your cost is lower than the break-even point, meaning you’ll actually generate a profit despite offering your customer a discount. (See Strategy 3 for further information on this technique.)
Strategy 2: Early Payment Discount to Avoid Bad Debt & Lower Risk
A second, less-commonly utilized early payment discount strategy, is using the early discount concept to head off payment issues that you see developing and suspect could soon turn into bad debt. If you have reason to believe that a customer is in danger of becoming insolvent, the more attractive you can make the discount, the more likely you are to be paid — and the sooner you can collect on the invoice, the less likely you are to find yourself on the losing end of a potential bankruptcy or structured liquidation.
Again, this means doing the right calculations to make sure the discount you offer is one that’s attractive enough to encourage payment but is also one your company can live with. Using our early payment discount formula makes it easier to see at a glance what the cost of various possible discounts would be in order to find the point where you can maximize the attractiveness of your offer without paying too much for the privilege.
Strategy 3: Early Payment Discount to Generate Financial Gains
This is where the early payment discount gets more intriguing. This incentivization, when used as part of our third early payment discount strategy, can help you achieve even greater success. By enabling you to move beyond mere protective strategies, which optimize your payment timetable and improve your cash flow but do so at a cost — namely, lower revenues — this tactic can actually generate measurable profits for your business.
Yes, that means that even with the discount, your business can profit financially while getting paid sooner.
From your vantage point, this is a valuable technique that you can use to turn your receivables into profits while also improving cash flow. And that makes it a win/win for both you and your customer. It saves your customer money while providing you with a way to help your company get ahead. Our guide explains exactly how it’s done. If the strategy is used wisely and consistently, those profits will grow.
Helping You Get Maximum Return on Your Company’s Investment in Accounts Receivable
According to the Credit Executives Handbook, “Cost of capital and time value of funds have a direct bearing on the value and profitability of a business’s investment in receivables.” This is why we offer a proactive approach that shortens the credit cycle and lowers your costs while helping you focus on the actions that will help you achieve the ultimate objective of the extension of credit: maximum return on your receivables investment.
Here’s another quote from the Handbook that could have been written as an introduction to our Early Payment Discount Guide and Spreadsheet:
“The credit function should be concerned with maximizing revenues and profits more than with minimizing risks of credit losses. To best contribute to company financial growth, a credit executive should adopt a broad approach to meeting objectives and solving problems.”
This is the direction we’re going with our Early Payment Discount Guide.
Download Our Guide & Spreadsheet to Start Using Early Payment Discount Solutions Today
With our proprietary spreadsheet, you can put these ground-breaking strategies to work for your company today and begin reaping the benefits of Ben Ricci’s approach right away. We not only provide everything you need to implement these powerful strategies for your business; but more importantly, we suggest highly effective ways to “sell” these discount offers to your customer base at various levels.
Click This Link to receive your free copy of our spreadsheet. Then follow the early payment discount formulas we’ve outlined to calculate the discount that will work most effectively to meet your specific goals.