Fashion Exposed Revived will take place on 20 – 24 February 2015 at Sydney Showground, Sydney Olympic Park. Organiser AGHA shares some business insights ahead of the event, which will also feature a series of industry seminars. Head here for more.
The obvious thing everybody wants to negotiate is the PRICE paid. Whilst that is important, there are at least 20 other things you can negotiate. One of these things is your payment terms, including your (early) settlement discount.
When vendors offer (cash) discounts for early payment, it is important to do the maths to ascertain whether it is worthwhile. Whilst a 3% discount may seem trivial, it can represent significant savings.
The $ amount saved should be seen as ‘interest’ paid to the retailer (by the vendor) for the ‘loan’ which amounts to the net amount paid by the retailer – for a certain number of days.
A retailer buys merchandise with a list price of $1000. If the term is offered as 3/10 n/30, it means that the full amount is payable in 30 days from the invoice date, but 3% discount is offered if paid within 10 days.
Let’s assume that the invoice is dated 5 June – which means the full amount is due 30 days later on the 5th July. If, however, it is paid by the 15th of June, the retailer is entitled to a 3% discount. The vendor is offering the retailer 3% discount to pay the account 20 days earlier than usual. [Because the vendor gets the money 20 days earlier, they will pay interest on being able to use the money for the 20 days.]
It is calculated as follows (for the above example):
THE FORMULA: (Amount Saved/ Net Amount Paid) x (365/No of Days Saved)
Amount Saved 3% x $1000 = $30
Net Amount Paid $1000 – $30 = $970
No of Days Saved 20 days
Substituting in the formula, the ‘interest paid’ by the vendor:
($30/$970) x (365/20) = 56.4%
The annualised rate of interest (i.e. saving to the retailer) is 56% – which is a great deal better than leaving the money in the bank for an extra 20 days. [Where it would have earned say 10% per annum; which equates to about $5.48 for the 20 days as opposed to $30 as per above.]
These numbers are realistic and the situation often presents itself. This means that it is usually a good deal to take the early payment option. But please note that there is an assumption that this is the best use of funds. Retailers must consider alternative uses and cash-flow impacts as this illustration simply compares the early payment option with the alternative of a bank deposit. (The story changes if you are funding your business via overdraft for instance.)
Dennis
GANADOR
Helping retailers and their suppliers create win-win outcomes