Cash Discounts for early pay.

Occasionally someone will ask me if they should offer or accept cash discounts for early paying of invoices.  When I first started in business way back in the 1980's, it was common to see 2% 10 days, net 30 terms.  Meaning that if you paid in 10 days or less, you could discount your payment by 2%.  Otherwise, you owned the whole amount in 30 days.  

As interest rates dropped in the later 80's and 90's, the 2% discount was offered less and less.  A 1% or even .5% discount became more common.

So, the questions are:  Should I take this discount if it is offered?  And, Should I offer such a discount to my customers?

Actually the answer to both questions is simple and clear...with one major condition.  The general rule is:  

IF YOU CAN DO IT....., Take the early pay cash discount if offered to you.  And, IF YOU CAN DO IT....., Do not offer an early pay cash discount to your customers.

The "if you can do it" is major condition I'm talking about here.  You may have a cash flow situation that forces you to break your general rule.  I'd suggest that you try to stick to your general rule as much as you can.  Only break it on a case by case situation.

Here's how I think about it math-wise.  Let's say you are offered  1% 10 Net 30.  Basically you are saving 1% by paying 20 days early.  So you are making 1% in a 20 day period.  How many 20 day periods are in a year?  Approximately 18. So you make 1% 18 times.  That's 18% a year. (It is actually more than 18% because of the principle of compound interest, but that just complicates the argument.  Let's stick with 18%)  That 18% return is awfully hard to beat.  I will admit that in the real world, it doesn't work as simply as this, but the principle still holds true.

My wish for you is that you will be in a comfortable enough position to take advantage of these kind of discounts.  Right now, if you can't do it every time, just do it as much as you can.  We can talk about this and other ways to pay if we do some consulting together.