If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
Who doesn’t love a discount? Many small business owners have realized that offering a purchase discount to their customers frequently leads to earlier payments and improved cash flow. Learn more about cash discounts and why they might be a good idea for your business.
One of the best ways to get your customers to pay their bills early is to offer them a cash discount. A cash discount is usually around 1 or 2% of the invoice total, although some businesses may offer up to a 5% discount.
But before you jump on board, be sure to review the following accounting terms so you know exactly what you’re getting into.
Discounts can be especially helpful for newer businesses. If you’re still in the process of establishing relationships with customers, offering a discount provides your customers with a strong incentive to pay their invoices early while also helping to increase your cash flow if they do, making both parties happy.
Nancy recently opened a cleaning service. The majority of her clients pay her in advance of her services, but she has extended credit to a few of her regular customers.
To provide an incentive for her customers to pay her earlier, Nancy starts to offer them a 5% discount if they pay within 10 days of the invoice date. Below is a copy of the invoice Nancy sent to one customer.
The cash discount formula is based on the terms included on the customer’s invoice. In this example, if Northside Insurance pays its $600 bill by July 10, it can take a 5% discount from the invoice total, and pay only $570. If it chooses not to pay early, the entire $600 is due by July 30.
While not all businesses are in a position to offer a cash discount to their customers, if you’re able, there are a lot of benefits.
Instead of waiting 30 days for payment, offering a discount increases the odds of getting paid in 10 days or less. Early payment means better cash flow for your business, and the discount rewards your customers who pay early.
If you currently sell to customers on credit, you know that part of the process involves following up on past due accounts, mailing additional invoices, making phone calls, and sometimes even getting a collection agency involved.
While offering a discount doesn’t eliminate the possibility of your accounting clerk having to do any of those things, it does reduce the occurrence.
Everyone likes a discount, even if it’s just a few dollars. Giving your customers a cash discount will likely motivate them to pay early, or at the very least, on time.
If you’re just beginning to build your business clientele, you know how hard it is to attract and keep good customers. Providing a few perks can help you grow your customer base and keep them coming back to buy the products or services you offer.
You’ll need to do two journal entries to record any invoice: one when the customer is initially billed, and one when payment is received. For the entries below, we’ll assume that Erin offered her customer a 2% discount if they paid in 10 days. The initial journal entry made by her bookkeeper would be:
Date | Account | Debit | Credit |
---|---|---|---|
6/15/2020 | Accounts receivable | $500 | |
6/15/2020 | Sales revenue | $500 |
If Erin’s customer takes the cash discount, processing the payment is a little different, with the journal entry looking like this:
Date | Account | Debit | Credit |
---|---|---|---|
6/24/2020 | Cash | $490 | |
6/24/2020 | Cash Discount | $ 10 | |
6/24/2020 | Accounts receivable | $500 |
However, if Erin’s customer did not take advantage of the discount, the entry would be:
Date | Account | Debit | Credit |
---|---|---|---|
7/10/2020 | Cash | $500.00 | |
7/10/2020 | Accounts receivable | $500 |
There’s no right or wrong answer to that question. It can depend on a lot of things, such as your current financial situation, how many customers you sell to on credit, and if the discount would financially impact your business. However, if you’re just getting started in a crowded field, offering a discount can help you stand out from the competition.
Yes, both terms mean the same thing.
The idea is worth considering. Offering customers a cash discount, even a minimal one, can be advantageous for your business and your customers. If you don’t offer credit terms to your customers, or your customers tend to pay on time, offering a cash discount won’t help your business much.
But if you’re looking to build a strong customer base, provide a little extra incentive for your customers to pay you early, and even stand out from the competition, it might be worth it to begin offering cash discounts to customers.
Our Small Business Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.