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Today's Wiki-Wednesday topic is Payment Terms. Below is an excerpt from the Wikipedia article on Discounts and Allowances, but if you would like to read the full article at the source you can click here. One of the areas where I have always felt challenged is in speaking to Finance. As we learned last week in the S&DCE event on procurement performance measurement, 1/3 of procurement organizations now report into finance. Clearly it is important for procurement to get a better understanding of cash flow (among other things) – both in terms of its value to the organization, but also in how you are in a position to affect it. Yesterday we heard from The Sales Guy on the role payment terms may play in deal negotiations and recommendations for discussing them with the CFO. If you are new to payment terms and don't feel comfortable discussing them, check out today's post on The Point, "Payment Term-INOLOGY".

Discounts and allowances dealing with payment

Prompt payment discount

Trade Discount:Deduction in price given by the wholesaler/manufacturer to the retailer at the list price or catalogue price. Cash Discount:Reduction in price given by the creditor to the debitor is known as cash discount. This discount is intended to speed payment and thereby provide liquidity to the firm. They are sometimes used as a promotional device.

Examples
  • 2/10 net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 2% discount if they pay within 10 days of the invoice date.
  • 3/7 EOM - this means the buyer will receive a cash discount of 3% if the bill is paid within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month.
  • 3/7 EOM net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month.
  • 2/15 net 40 ROG - this means the buyer must pay within 40 days of receipt of goods, but will receive a 2% discount if paid in 15 days of the invoice date. (ROG is short for "Receipt of goods.")

Preferred payment method discount

Some retailers (particularly small retailers with low margins) offer discounts to customers paying with cash, to avoid paying fees on credit card transactions.

Partial payment discount

Similar to the Trade discount, this is used when the seller wishes to improve cash flow or liquidity, but finds that the buyer typically is unable to meet the desired discount deadline. A partial discount for whatever payment the buyer makes helps the seller's cash flow partially.

Sliding scale

Main article: Sliding scale fees

A discount offered based on one's ability to pay. More common with non-profit organizations than with for-profit retail.

Forward dating

This is where the purchaser doesn’t pay for the goods until well after they arrive. The date on the invoice is moved forward - example: purchase goods in November for sale during the December holiday season, but the payment date on the invoice is January 7.

Seasonal discount

These are price reductions given when an order is placed in a slack period (example: purchasing skis in April in the northern hemisphere, or in September in the southern hemisphere). On a shorter time scale, a happy hour may fall in this category. Generally, this discount is referred to as "X-Dating" or "Ex-Dating". An example of X-Dating would be:

  • 3/7 net 30 extra 10 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date plus an extra 10 days.


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