What is Deferred Discount?
Deferred discount, also known as a cash discount, is a form of early payment incentive offered by a seller to a buyer. It is a discount offered on the purchase price of goods or services if payment is made within a set period of time. The objective of a deferred discount is to encourage the buyer to make payment earlier than the normal due date, thus improving the seller’s cash flow.
How Does Deferred Discount Work?
The seller will usually state the terms of the deferred discount on their invoice. These terms usually include the percentage discount that is available and the time period in which payment must be made in order to qualify for the discount. For example, a seller may offer a 2% discount for payments made within 10 days of the invoice date.
Advantages of Deferred Discount
Deferred discount offers several advantages to the seller:
- It encourages buyers to make payment earlier than the normal due date, improving the seller’s cash flow.
- It reduces the risk of late payment and bad debt.
- It can reduce administrative costs, as the seller may not need to chase overdue payments.
- It can help to maintain relationships with buyers, as they may be more inclined to purchase goods or services from a seller who offers discounts.
Disadvantages of Deferred Discount
The main disadvantage of deferred discount is that it can reduce the seller’s profits. If a large number of buyers take advantage of the discount, the seller may not be able to recoup the cost of the discount. Furthermore, if the buyer fails to make payment within the set time period, the seller may have to bear the cost of the discount.
Conclusion
Deferred discount can be a useful tool for sellers to encourage buyers to make timely payments, thus improving the seller’s cash flow. However, it is important to weigh up the advantages and disadvantages before offering this type of discount.