Incentive Discount Problem for Business and Finance Contractor Test
When asked to compare two incentive discounts, consider:
- The cash amount being discounted (lost)
- How quickly you will get your money
Remember an incentive discount like “2% - 10 days, net 30” means the following:
- If you get paid (the customer who owes you pays you) within 10 days of the billing date on the invoice, they save 2%. For example, if the bill is $1,200.00, they will only send $1,176.00. NOTE: $24 is 2% of $1,200.00.
- If the customer is not interested in the discount, they can simply pay the regular amount with 30 days of the billing date.
So if a question asks to evaluate whether it is better to offer “1% - 45 days, net 60” or “2% - 10 days, net 60” on an invoice for $4,500.00, the answer would be “2% - 10 days, net 60” because even though you receive 2% less instead of 1% less, you collect on your receivables much faster.