should a firm take trade discounts of 1/10 net 30?

Answer 1

Sure- my company takes advantage of discounts when ever they are offered- which is not very often anymore. I work for an export company, and we have many suppliers and discounts are always appreciated and taken advantage of.

ps- this means a 1% discount if you pay in 10 days, and if you miss the 10 day mark, you pay the full invoice amt in 30 days

Answer 2

From your description I am assuing that if the invoice is paid early there is a 10% discount and if not it's full amount is due in 30 days. From your description it is difficult to tell what the term limit is for the customer to take advantage of the 10% discount. 1/10 tends to indicate an immediate payment is require (1 day / 10%).

Whether or not this is an acceptable term is based on a couple of componets.

1) Value of Money Over Time - Let's say the total invoice is for $10,000. If they pay it immediately the company will receive $9,000 with the discount amount being $1,000. The question is, can this $9,000 be put to use over the next 29 days and bring in at least $1,000 or more? If so, then the 10% term is cost effective.
2) Customer Retention - Since many companies offer these types of terms, it may be a necessary 'evil' in order to retain customer or to attract new business. With this knowledge beforehand, a business and manipulate their product cost to compensate. For example, a business could raise it's product price by 5% and since they know 1/2 of their customers will take advantage of the quick pay discount it will even out over all.

On the customer side of the process, again the same rule of Value of Money Over Time above applies. Also, there could be the possiblity of negotiating lower product prices with the vendor if the company has a history of always paying quickly.

Hope this helps!