Cash Discount

A company short of cash resources and facing liquidity problem may consider the use of cash discounts to influence its customers to pay promptly. There are two important of cash discount policy aspects -

• Cash discount rate
• Cash discount period

Giving the cash discount facility is not the same as cutting the prices and there by affecting demand. It is a mechanism through which the company is giving some benefits to customers who opt to pay early. There is a remote possibility that all customers will pay the company their dues within the cash discount period. Only a segment of customers who have sufficient cash resources and good liquidity position will avail cash discount facility. A Student Loan or Private Student Loans can’t consider cash discount. Cash discount will affect customers and sometime loss of revenue too.

The introduction of cash discount as a policy will also affect customers who were paying promptly earlier. Suppose 5 percent of sales were on case basis and rest 95 percent on credit, by introducing cash discounts, the company has to pay cash discount to the 5 percent customers who were paying cash immediately at the time of sale. Some of the customers from the 95 percent segment would avail cash discount but certainly not all.

The cash discount policy would result into loss of revenue to the company. At the same time the company would experience a quick collections resulting in to lower collection period. The reduction in average collection period in turn will affect the investment in accounts receivable. A College Loans for students can’t consider as revenue loss.  Before deciding about the cash discount policy the company has to find out whether the returns on funds released on account of reduction in investment in accounts receivable is more than the loss of revenue. Only if the return completely offsets the loss of revenue the cash discount policy should be introduced.