The credit terms of your business should be designed to improve your cash flow. Some businesses allow customers to take a trade discount off the original sales price if the customer pays within a specified period of time. The amount of the trade discount is typically 1 percent or 2 percent if the customer pays within 10 days. Full payment is normally due within 30 days if the customer doesn't take advantage of the trade discount. Some service-oriented businesses, like doctors or dentists, offer a trade discount of sorts for immediate payment upon completion of their services. Offering trade discounts has both advantages and disadvantages.
Advantages. The main advantage of offering trade discounts is that it shortens the average collection period. Shortening the average collection period for accounts receivable is one of the biggest hurdles in accelerating your cash inflows.
Disadvantages. The primary disadvantage of offering trade discounts is
the cost to your bottom line profit associated with the lost revenues. The cost
of trade discounts must be weighed against the improved cash flow expected.
Another possible disadvantage is the increase in time necessary for billing and
accounts receivable processing. In order to take full advantage of trade
discounts, billing should take place as early as possible, which is generally
the shipping date. For some small businesses this may require additional