It's common practice for suppliers to offer discounts to retailers who pay the invoice in full by a specified date. Retailers who don't take advantage of the opportunity are making a costly mistake, says Tim Christiansen, assistant professor of retail management.
"Many retailers just toss the bills into a pile and pay them when the net amount on the invoice is due," he says. "If retailers looked at the discount the way it should be viewed, as an interest expense, they would quickly see they are sometimes paying 30 percent to 40 percent interest annually."
Typically, a retailer receives an invoice specifying the percentage discount being offered, the discount period and the full amount of the invoice. For example, an invoice with the terms 2%/10, net 30, means retailers can take 2 percent off the price of the merchandise if they pay within 10 days. Otherwise, the full amount is due within 30 days.
To a retailer who would only have to pay $980 on a $1,000 invoice within the first 10 days, the $20 seems like small change, Christiansen says, but it's as if the retailer is paying $20 "interest" to "borrow" that $980 for 20 days. That's the equivalent of a 36 percent annual interest rate.
"Even credit cards don't charge that much interest," he says.
But retailers often don't have cash-in-hand, and they use this as an excuse for not taking advantage of discounts. Christiansen says borrowing from a bank is better than foregoing the discounts.
He also notes that suppliers offer the cash discounts to stimulate cash flow, and that the discounts aren't legally defined as loans.
CONTACT: Christiansen, (317) 589-7808; e-mail, firstname.lastname@example.org