Everyone is aware of discounts. Discounts are offered to encourage a pest management company's customers to pay faster. A number of service-oriented businesses, like doctors and dentists, offer a trade discount of sorts for immediate payment upon completion of their services.

Suppliers often extend discounts in an effort to improve their cash flow. Few pest management professionals (PMPs), however, have given much thought to either the cost of offering discounts or how much can really be saved by taking advantage of those discounts.

Prompt payments from customers mean improved cash flow, a reduced need for borrowed working capital and far fewer collection problems than before. Little wonder, then, so many businesses offer discounts and incentives to speed payments. But, how much can you profit taking advantage of discounts offered by suppliers?

The supplier's invoice includes credit terms, listing the period of time for which credit is extended, the size of the discount offered if the buyer pays cash and the date the credit period begins. A cash discount is a reduction in the purchase price provided the buyer pays within a specific time period.

A typical supplier's credit terms may be stated as "2/10 net 30." A buyer reads the terms as "a 2-percent discount will be allowed if the invoice is paid within 10 days. Otherwise, the balance is due in 30 days." Why should anyone pay quickly in order to take advantage of a mere 2-percent discount?

Assume a business has been extended credit terms of 2/10 net 30 on a $1,000 janitorial supplies purchase. By deciding to take the discount, the company will pay $980 ($1,000 less 2%). By ignoring the discount, the full cost of $1,000 will be paid within the month.

The decision not to take the discount means the buyer is paying $20 to keep the money for an extra 20 days. Because there are slightly more than 18, 20-day periods in a year, the interest cost — on an annual basis — amounts to more than 36 percent. Obviously, this level of potential savings makes it a smart move to take the discount, even if money must be borrowed in order to do so.

Discounts Cost As Well As Pay

How can a pest management business afford to offer customers a discount for prompt payment? It all boils down to the cost of those discounts. What does it cost a pest management business to offer its customers a discount for cash or prompt payments? The answer can often be found in operation's cash flow.

The principal disadvantage of offering discounts is the cost to the pest management operation's bottom-line profits arising from the loss of revenues. The cost of trade discounts must be weighed against the improved cash flow that can be expected. Don't overlook the impact on profits.

Obviously, the credit terms of your pest management business should be designed to improve the operation's cash flow. In its most basic form, cash flow is the movement of money in and out of a business.

In order to speed up the inflow of cash into their businesses, some pest management companies offer customers a trade discount off the original sales price if the customer pays within a specified period. The amount of the trade discount is typically one or two percent if the customer pays within 10 days. Full payment is normally due within 30 days if the customer does not take advantage of the trade discount.