I got a great idea recently from Abe WalkingBear Sanchez that he gave me permission to share with you.
Companies sometimes offer credit customers a 2-10-N30 payment term. (i.e. the customer can take a 2% discount off the invoice amount if they pay it within 10 days otherwise the full invoice amount is due in 30 days.) The idea being to spur cash flow.
Any customer not taking advantage of a 2-10-N30 early pay discount fails to do so for one of two reasons:
1) they don’t have the financial ability to do so … no money, or
2) the sales and credit guys failed to explain that a 2-10-N30 is worth a 37.24% Annual Rate of Return … where else can you get 37.24% return with no risk?
There’s a problem with early pay discounts. Sometimes customers will cut a check for payment on an invoice, less 2%, on the the 10th day but will not release the check until the 30th day or the 60th day thus defeating the very reason why the discount was offered in the first place … and further creating additional work and cost for both seller and customer in the pursuit of the unearned discount. I’ve never liked 2-10-N30 terms for these reasons.
There is a way to use an early pay discount to improve cash flow and also bring the customer back to buy again thus gaining the most profitable sale, the repeat sale. Instead of offering a 2-10-N30 term a business can send out, along with an invoice, a VCDC: Valued Customer Discount Certificate for 2% of the invoice amount … and they can put the selling company’s CEO’s picture or the selling salesperson’s picture on the certificate … or Marilyn Monroe’s picture. Each VCDC would carry the same # as the invoice it applies to and thus would be easy to track.
The VCDC would clearly state that if the invoice the VCDC applies to is paid within 10 days of the invoice date the customer can use the VCDC on their next purchase. If a customer pays in 15 days … cut them some slack and accept the VCDC … on that next most profitable purchase, then repeat.
The end result? Improved cash flow and more repeat sales.