An early payment discount – sometimes called prompt payment discount or a cash discount – is when a vendor offers a discount to a customer if the invoice is paid before the due date.
The terms of early payment discounts vary. But the most common prompt payment discount is called 2/10 net 30.
Let’s break that 2/10 net 30 prompt payment down:
- 2 means 2% – the amount of the early payment discount
- 10 means 10 days – how long you have to pay the invoice to qualify for the discount
- Net 30 means 30 days – the total amount of time you have to pay the invoice
So an early payment discount of 2/10 net 30 means that the customer can deduct 2% from the total vendor invoice amount if paid within 10 days of the invoice date. If the payment is not made within the first 10 days the customer must pay the full amount before the 30th day.
According to the Institute of Finance and Management, for every $1 billion in PO spend, there’s typically more than $3 million dollars in early pay discounts left uncollected. Let’s explore why.
Why Do Vendors and Suppliers Offer Early Pay Discounts to Customers?
From a vendor or supplier perspective, prompt pay discounts accelerate cash flow. Early payment discounts allow suppliers to get paid sooner -which allows them to reinvest that cash sooner.
Early pay discounts also reduce the risk of nonpayment or late payment by taking accounts receivable off the books more quickly. This is particularly appealing to companies that operate on a cash rather than accrual accounting basis.
In addition, for some suppliers, an early payment discount is an attractive alternative to traditional financing methods like commercial-based lending.
Finally, many vendors and suppliers feel that early payment discount programs are good for marketing – especially toward cash-heavy customers. Offering a discount is always a solid marketing and sales move.
Why Do Customers Want Early Payment Discounts from Vendors?
Simple: to reduce cost.
If a customer’s primary goal is to reduce cost of goods sold, then early payment discounts help. A 2% discount on a $100,000 invoice means $2,000 in savings, improving the company’s bottom line.
So Why Do So Many Early Pay Discounts Go Unused?
Why do so many companies not take advantage of prompt pay discounts?
Sometimes the primary objective of buyers is to be as conservative as possible with cash by aging invoices and extending the cash conversion cycle. Those customers prioritize cash on hand over a 2% discount.
However, many other companies would love to take advantage of prompt payment discounts but simply do not have the proper AP processes in place to qualify for early payment discounts.
Companies that do manual AP processing or inefficient AP automation cannot turn invoices around quickly enough to qualify for early payment discounts.
Is that you?
How Can You Get Early Payment Discounts
Capturing early pay discounts requires quick turn on AP invoices. So these discounts were traditionally only available to larger companies with very complex and expensive ERP systems.
But today even small and medium sized companies can take advantage of early pay discounts! All it takes is AP automation, managing accounts payable effectively and applying AP automation best practices.
CoreIntegrator’s AP automation solutions give any sized company the ability to turn AP invoices around in under 10 days.
CoreIntegrator Enterprise provides enterprise level workflow automation across your entire organization – including AP automation.
A/P One is a cloud-based SaaS AP automation solution specifically tailored for smaller companies (starting at 250 invoices per month).
All of our AP automation solutions automate invoice data entry and invoice approval making your AP department 500 times more efficient. This video explains how.
With that kind of AP invoice process efficiency your company can easily turn invoices around in under 10 days.
And our AP automation solutions also allow you to identify and prioritize invoices with an early pay option. They will show you where prompt pay discount money-saving opportunities exist so you can take advantage of them.
You can use that information to change invoice payment prioritization by adjusting the payment schedule to capitalize on prompt pay discounts.
Don’t Ask, Don’t Get
Being able to turn AP invoices quickly is only half of the early pay discount equation. Because to take advantage of early pay discounts your vendors have to offer them.
And the best way to get your vendors to offer them is to simply ask.
The great news is that in addition to allowing you to qualify for early pay discounts, AP automation is a staff force multiplier for your AP department.
When your AP specialists and AP clerks are no longer spending a bulk of their time manually entering invoice data they are freed to take on new duties and responsibilities. They can add value to your organization without adding any expense.
With AP automation in place, your AP staff will be freed to spend time on vendor relations. So why not have your AP staff spend the time they used to waste on data entry contacting vendors to inquire about the possibility of early payment discounts? Or shopping for less expensive vendors?
The possibilities are endless.
Bottom Line – Early Pay Discounts
Early payment discounts are usually a win-win for vendors and their customers.
But to qualify for them your organization needs efficient invoice processing and approvals processes. And that’s where CoreIntegrator’s AP automation solutions shine. With AP automation your company will save time and money AND qualify for early payment discounts.