In short
Applies to: Working capital business owners and accounts teams
- Compare the discount saved with the cost of paying earlier over the same number of days.
- Use consistent payment dates and distinguish simple annualised rates from compounded rates. Also check available cash, supplier terms and mandatory payment deadlines before deciding.
“Pay within ten days and take 2% off; otherwise pay on day thirty.” The discount is easy to understand. Its financing effect is less obvious: you are giving up twenty days of credit to save that amount. Compare the timing before accepting or refusing the offer.
Identify the actual alternative
Confirm the discount applies to the amount being compared and that payment on the discount date will qualify. Count the days between that payment and the normal contractual payment date. Do not use an overdue or legally impermissible payment date as the source of extra credit. Any applicable MSME payment obligations need separate consideration.
Work through the example
On a comparable ₹1,00,000 amount, a 2% discount means paying ₹98,000 on day ten instead of ₹1,00,000 on day thirty. Keeping ₹98,000 for those twenty extra days costs ₹2,000, a period cost of approximately 2.0408%. A simple annualised comparison is about 37.24%. An effective annualised comparison is about 44.59%, assuming the same arrangement could repeat and compound throughout a 365-day year. That repetition is a mathematical assumption, not a predicted annual expense.
Compare rates on the same basis
Do not compare an effective annual figure with a borrowing rate that excludes fees and then declare a saving. Consider the actual funding period, charges, available limit, security terms and cash needs elsewhere in the business. If paying early leaves insufficient cash for wages or an essential purchase, the discount percentage alone does not settle the decision.
The accompanying tool displays both annualised measures and the days accelerated. It does not recommend taking a loan, changing agreed terms or delaying statutory payments. For irregular purchases, examine the rupee amount and cash dates first; an annualised percentage can look dramatic even when the transaction is small.
Keep the decision traceable
Save the supplier’s written terms and evidence that the discount will be accepted. Confirm the invoice and tax documentation needed for the arrangement. Use the result alongside the existing working capital cycle tool, then record why taking or declining the discount suits the business’s actual cash position.
தமிழ் சுருக்கம்
முன்கூட்டியே பணம் செலுத்தும் தள்ளுபடியை மதிப்பிடும்போது, கிடைக்கும் தள்ளுபடியுடன் எத்தனை நாட்கள் முன்பே பணம் செலுத்த வேண்டும் என்பதையும் பார்க்க வேண்டும்.
Practical next step
Browse business templates and record the assumptions and follow-up actions.
Sources
This article is for general information only and does not constitute professional advice. Please consult a qualified professional before acting on it.
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