There are several things to be considered when deciding whether to take vendor discounts for paying early as opposed to paying the full amount on time. One of the major drivers of whether or not to take early payment discounts is the set of alternatives that your organization has for using the cash and whether those alternatives would provide a better rate of return than you would get by taking the discount.<\/p>\n
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As we teach in our online course, Finance For Strategic Procurement, Part II, the rate against which cash usage and investing is evaluated usually is the organization\u2019s weighted average cost of capital. It\u2019s a pretty complex topic too extensive to discuss on this blog. But it takes into account various uses of the organization\u2019s money, from paying down debt, to reinvesting in a growing part of the business, to investing the cash in bank accounts or securities.<\/p>\n
Let\u2019s focus on \u201cinvesting the cash\u201d for a moment.<\/p>\n
If an organization\u2019s only benefit to holding the cash longer was the fact that it could earn interest during that time, accepting most suppliers\u2019 early payment discounts will beat that alternative in today\u2019s environment. Handly.<\/p>\n
Interest rates for bank investments are ridiculously low at the moment. I\u2019ve seen one bank\u2019s savings rate for a million dollar balance be less than a half-a-percent! And their certificate of deposit rates were not much better, requiring a commitment of at least 48 months just to hit 1%!<\/p>\n
Hopefully, your organization has other areas in the business that it can invest in for a greater return. But, if earning interest was the main reason your organization liked to forgo those early payment discounts in the past, the 1 or 2% your suppliers are offering to shave off your price in exchange for paying 20 or so days early looks mighty good right now, doesn\u2019t it?<\/p>\n","protected":false},"excerpt":{"rendered":"
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