Accounting Best Practices, Fifth Edition

7–6. Grant Percentage Discounts for Early Payment

Some companies have large customers that pay late all the time. These customers are important to the company, and the customers abuse the one-sidedness of the relationship by stretching out their payments. In these cases, a company has little leverage, for it will lose a significant volume of sales if it cuts off the errant customers or cuts back on their credit limits.

In these cases, a company may have no choice other than to grant an early payment discount to customers in order to bring in cash sooner. This approach is especially effective if a company is in immediate need of cash. Also, accounts receivable that are outstanding for a long time period will require a number of collection actions, whereas one that is paid immediately will not require any; thus, the use of an early payment discount reduces the cost of collections.

The discount is an easy one to implement. A company usually prints the discount on its invoices so that customers will see it the next time an invoice is mailed to them. However, most customers already have payment terms included in their payment databases and a sudden change in terms may not be noticed. Accordingly, it may be necessary to call the customers’ accounts payable staffs to notify them of the change. An alternative approach is to offer the discount only to a few key customers representing a high volume of sales or who are constant late-payers. By reducing the number of customers who take discounts, ...