# Discount

The cash discount (from Italian sconto , to scontare , "deduct, settle") is a price reduction on the invoice amount (excluding freight costs etc.) if payment is made within a certain period. The customer receives an undefined discount for early payment of the invoice (e.g. 2% discount for a payment within 14 days). An undrawn discount is a form of interest payment for the supplier credit . The customer waives a 2% discount so that he can pay the invoice amount 16 days later. The terms of payment for this example would be: "Payment 14 days 2% discount, 30 days net."

When paying with a discount, the customer receives a credit from the supplier free of charge in the form of a value and / or discount period. The customer pays no surcharge (interest) for the supplier credit when drawing a discount .

## Assessment basis

The discount base is not always the entire invoice amount, but - especially in the craft sector - often only the material cost share . Production costs are wage labor and, like maintenance bills, “may” not be discounted, which is, however, only a custom and has no legal basis. The assessment basis is basically freely negotiable. It should be shown in the offer and on the invoice.

## Discount rate

The discount rate specified as a percentage of the assessment base is referred to as the discount rate. The discount rate is usually two to three percent, it can be constant or staggered over time. With a time-based discount scale, the higher the discount rate, the shorter the discount period. The payment terms of the German textile industry, in which there is a condition cartel , are an example of this . After that, the invoices are payable as follows: within 10 days with a four percent discount or from the 11th to 30th day with a 2.25 percent discount or from the 31st to 60th day net.

## Payment term

The payment condition "within 14 days less two percent discount, within 30 days net " means: If the invoice is paid within the discount period of 14 days, the debtor may deduct two percent from the assessment basis. If payment is made after the discount period has expired, the full invoice amount is due. If the debtor allows himself more than 30 days, default interest and possibly dunning costs are to be paid. If he discounts after the discount period has expired, there is a forced discount that the supplier can claim back from the debtor.

## Example: discount or use the payment term?

If a customer orders goods worth 1,000 euros from a supplier with a payment term of 30 days, this corresponds to a loan of 1,000 euros with a term of 30 days. This credit is called a supplier credit . If the supplier issues an invoice to the customer with the payment condition "14 days (discount period) 2% discount (discount rate) , 30 days (payment target) net" , the customer can pay the invoice within 14 days with a discount of 2%.

Alternatively, he can pay the invoice after the discount period within the discount reference range (payment target - discount period), i.e. from day 15 to day 30; this results in interest costs in the amount of the lost discount. The supplier credit is usually very expensive. If you calculate the discount deduction in comparison to the time, the result is a very high interest rate per year. This interest rate is calculated approximately as follows:

${\ displaystyle {\ frac {Discount rate \ times {\ text {360 days}}} {{\ text {Payment term in days}} - {\ text {Discount period in days}}}}}$.

In the above example, the interest rate is p. a .:

${\ displaystyle {\ frac {2 \, \% \ times {\ text {360 days}}} {{\ text {30 days}} - {\ text {14 days}}}} = 45 \, \%}$. In the example, the supplier credit corresponds to a bank loan with an interest rate of 45%. As a rule, a debtor should therefore discount.

For the exact calculation of the interest rate, see Lauer, Conditions Management, 1998, p. 61 ff.

For invoice recipients, it can be advantageous to take out a debt financed loan, e.g. B. at a bank to take advantage of the discount. The prerequisite is that liquid funds are available when the invoice is due.

## Discount calculation

The discount is part of the cost price calculation . The price before the discount is the target sale price , the price after the discount is the cash sale price :

${\ displaystyle {\ text {Cash sale price}} = {\ text {Target sale price}} \ cdot (1 - {\ text {Discount rate}})}$
${\ displaystyle {\ text {Target sales price}} = {\ frac {\ text {Cash sale price}} {1 - {\ text {Discount rate}}}}}$

Example: target price = 100.00 € / ME; Discount rate = 3% = 0.03

${\ displaystyle {\ text {Cash sale price}} = 100 {\ tfrac {\ mathrm {EUR}} {\ mathrm {ME}}} \ cdot (1-0 {,} 03) = 97 {\ tfrac {\ mathrm { EUR}} {\ mathrm {ME}}}}$
${\ displaystyle {\ text {Target sales price}} = {\ frac {97 {\ tfrac {\ mathrm {EUR}} {\ mathrm {ME}}}} {1-0 {,} 03}} = 100 {\ tfrac {\ mathrm {EUR}} {\ mathrm {ME}}}}$

## Discount modification

The discount rates are rarely modified in practice. Reasons:

• The reduction of discount rates once granted is difficult to enforce against customers
• Suppliers refrain from increasing the discount rates because it is difficult to reverse.

However, it should be noted that a discount is a mitigating tool with regard to the risk of bad debts. Customers who have an increased risk of default but who have sufficient liquid funds are preferred by suppliers to ask for shorter payment terms with a discount. The credit management in the company must be aligned to it.

## Discount as default interest deduction

The invoice amount includes interest that the customer may deduct within the discount period when paying. The discount can therefore be seen as a waiver of default interest.

${\ displaystyle {\ text {Default interest rate pa}} \ = \ left ({\ frac {\ text {Target sale price}} {\ text {Cash sale price}}} - 1 \ right) \ cdot {\ frac {360} {{\ text {payment term}} - {\ text {discount period}}}} \ times 100 \ \%}$

Example: With the payment condition "within 8 days less 2 percent discount, within 30 days net" the following applies:

${\ displaystyle {\ text {Default interest rate pa}} = \ left ({\ frac {100} {98}} - 1 \ right) \ cdot {\ frac {360} {30-8}} \ times 100 \ \% = 33 {,} 4 \ \% \ \ mathrm {pa}}$