Disclaimer: The content of these articles is to be used as a general guide only. Professional advice should be sought before taking any action relating to the points discussed in these articles.

EARLY PAYMENT DISCOUNTS

  I am not in favour of early payment discounts unless the real price is actually the discounted price and in effect the customer is paying a surcharge for late payment. I believe it is better to have confidence in your collection skills to collect the full amount owing. Also, sometimes your customer will pay late and still take up the discount. This leaves you with the choice of collecting the remaining balance or writing it off.
  I doubt very much if the savings in faster collections actually exceed the value of the discount. Of course, in some circumstances such as in times of severe cash shortages and for some industries, early payment discounts might be appropriate.
  A few years ago I was preparing to pay an account from a new supplier. In the mail that day was a statement offering me a 2.5% discount if I paid the account by a certain date. This company lost several hundred dollars by offering me regular early payment discounts because I was planning to pay their accounts on time anyway.
  When I attended a GST seminar in November 1999, several questions relating to early payment discounts were raised. It seems that you as an Australian supplier will be required to issue a credit note to your customer and show the amount of GST included in the credit when your customer pays the account less the discount. This extra paperwork will probably make it even less desirable to continue with early payment discounts after 1 July, 2000. Certainly, it would help if you contact the Tax Office if you plan to offer your customers early payment discounts after this date.

This article is reprinted from Rentons' Business Tips No. 7
© Copyright February 2000 ACS