Cash Management :

Use Vendor Discounts To Maximize Your Rate of Return

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Should you take a vendor’s discount? That depends. If your company’s funds are in a non-interest-bearing account, then discounts should always be taken when funds are available. When the funds would otherwise be earning interest, or when the funds would need to be borrowed, a simple formula can help you gauge if a discount is worthwhile.

The computed annual rate can be compared to the interest rate that could be earned if the funds were left in an interest-bearing account, or the interest rate that would have to be paid on borrowed funds.

Example: A typical discount offered by vendors is a 2% discount if paid within 10 days, otherwise pay the full amount in 30 days. This converts to an annual rate of 36.5%. Unless the company can earn an interest rate higher than this elsewhere, the discount should be taken.

For more ideas on maximizing your bottom line, please contact Kim Gregoris, member of the Berntson Porter Profit Enhancement Team at (425) 454-7990.