Applying cash discounts to invoices

Offering a cash discount can support a business by incentivising quick payments from its customers. In turn, this money can help a business grow at a faster pace, whilst saving unnecessary administrative expenses. 

This article explains how to integrate cash discounts within your invoicing, how they differ from trade discounts, and how cash discounts will benefit your business. 

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What is a cash discount? 

A cash discount, also known as a prompt payment discount, is a small incentive that a supplier can offer a buyer for paying an invoice ahead of the scheduled due date. 

If no due date is specified, UK invoices must be fully paid within 30 days. A business could therefore offer a percentage discount if the buyer pays the full invoice within 10 days instead, for example. 

Cash discount terms and conditions

Any discounts you offer must be included in your invoice’s payment terms. Typically, when a cash discount is offered, the seller writes the discount percentage, followed by the number of days it’s valid, then “Net [normal number of payment days]”. 

For instance, let’s say you offer a 5% discount on the amount due if a customer pays within 10 days, otherwise the full payment is due within 30 days. This discount can be written as “5/10, net 30”. 

Cash discounts - the basics

If you decide to add the option of a cash discount for your customers, you need to consider both the timeframe of the offer and how much discount you’re willing to provide.  

Cash discount period

The ‘discount period’ just refers to how long the customer has to pay their invoice and still take advantage of the discounted price. For example, if you include the terms of 3/10 net 30, it means they can benefit from a 3% discount if they pay the invoice within 10 days of issue. If they don’t pay within 10 days, the full amount is due within 30 days. 

When considering your discount, think about how quickly you want to receive payment. What will benefit your business the most? Usually, a cash discount is valid for a maximum of 10 days from the issuing date, although the discount period may also be shorter.  

How much discount should I offer?

It’s your business, so you can decide how much discount to offer. Not all customers will make use of the cash discount, but for economic security, assume that all will. Calculate your profit margin with this assumption in mind when deciding how much you can afford. 

Commonly, cash discounts are expressed as percentages. However, you may also choose to offer a fixed amount.   

Discounts and the invoice due date

Regardless of whether your customer makes use of the cash discount or not, the most important date on the invoice is always the due date. Any payment received after the due date would be considered late, and a late fee may be charged.  

The difference between cash and trade discounts

Both cash discounts and trade discounts can support your business, but they do so in different ways. Cash discounts aren’t reductions in the agreed sales price of goods or services, they are a reduction in what the customer must pay if the transaction is completed within a specified time period. 

Cash discounts incentivise customers to pay their bills quickly. Trade discounts incentivise purchases. 

It’s possible to apply both trade discounts and cash discounts to an invoice. For example, a customer may order products that are on sale. When you invoice for those discounted products, a cash discount may also be applied.  

Accounting for cash discounts 

If a customer accepts the cash discount and pays early, the payment you receive will be different from the amount you invoiced for. 

For example, if you invoice for £1000 and include “2/10, net 30” terms, the total you receive will only be £980. This is less than you invoiced for. In this case, the £20 (i.e. the 2% cash discount) should be recorded as an expense.  

Benefits of cash discounts

As already explained, small cash discounts benefit the seller as they increase the likelihood the customer will pay quickly. The business therefore has the cash quicker and can reinvest this in their business. It may be better for a company to receive 98% of what’s owed quickly than wait 30 days (or longer) to receive the full payment. 

Cash discounts improve your cash conversion cycle 

If implemented correctly, cash discounts can improve your business’s cash conversion cycle. This is a metric, measured in days, that expresses how long it takes for a company to convert its investments in inventory and other resources into cash flow from sales. 

A business’s cash conversion cycle essentially measures how long each net input GBP is tied in the business’s processes (production and sales) before it gets converted into cash output.    

A low cash conversion cycle matters: it indicates that the business is successfully converting inventory into cash and is working efficiently.  

Cash discounts reduce administrative work

Every fast customer payment means one less missed payment. The longer an invoice is left unpaid, the greater chance it’s forgotten, leading to more work for you as you chase up payments. For some businesses, this may increase administrative expenses. 

As a cash discount works as a reward for the customer, it has a strong impact and is immediately appealing. It incites actions to be taken immediately on something they’ll have to do later anyway. This means less administration on your part, allowing you to focus on other tasks, such as growing your business.     

Summary - cash invoice discounts

  • Cash discounts, used to incite fast payments, are different from trade discounts which incite initial purchases

  • When accounting for the cash discount, the discount can be recorded as an expense 

  • Offering cash discounts minimises administrative costs and improves a business’s cash conversion cycle.

Free invoicing software with discounts

SumUp Invoices is free invoicing software that helps you create invoices in under 1 minute. With our simple invoice template, you can ensure that your invoices are compliant and send them directly to your customers’ email. 

There’s a section on the invoice template to include payment terms and discounts. Simply enter your cash discount in the “Terms” box, and it will be clearly displayed at the bottom of your invoice. You can also save this information as default to be automatically included on all of your invoices.

You can enter your bank details on the invoice to receive bank transfers. If the customer takes advantage of the cash discount, they’ll simply transfer you the discounted amount. 

Trade discounts are also available with SumUp Invoices.

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