Early Payment Discounts? Why it is Not the Best Solution.
Delays in payments can create cash flow problems
Small business owners give credit to make sales and provide 30-day terms but often the customer will take more time and possibly not pay at all. These delays in payment can create cash flow problems for businesses that cannot afford to wait for payment. A business may be doing well in terms of sales growth, however, because customer collections trail behind the expenses, cash reserves shrink while the business is struggling to finance its overheads due to the lack of sufficient cash receipts from customer payments. But are early payment discounts the answer?
Is the solution early payment discounts?
Marketing gurus will tell you that you get customer loyalty by giving early payment discounts, and financial advisers will tell you that this is the way to get your money sooner.
The issues to consider before offering early payment discounts are:
Why are you giving the discount in the first place?
- Is it because your employees don’t like debt collecting and this seems to be an easy fix rather that put a strict overdue invoice strategy in place?
- Is it because your business cannot afford to carry a ledger of 30-day accounts? Maybe you need to reconsider the number of customers to whom you give credit and the credit limit you allow.
- Or is it that your business lacks policies and procedures to minimise the risk of customers either delaying payment or not paying at all.
- Early payment discounts lower your profit margins. Basically, you are agreeing to lower profits in exchange for quick payments. If you have a profit margin of 10% and you offer 2% discount, you are giving away 20% of your profit. That is a significant amount, especially if a large percentage of your customers take up the offer.
- Why give all your customers the early payment discount, when the customers who normally pay on time would pay regardless of the discounts.
- You cannot count on the customer paying early because of the discount offer, as they can and will change their minds at any time. Some clients could take the discount and still delay payment, which will impact on both your cash flow and your profits. You are then placed in a situation of solving a difficult problem. Obviously, you could call the client and attempt to collect – risking confrontation. If you do nothing and allow them the discount you would be rewarding them for their bad behaviour
In my opinion, you should not reward customers for paying their account. You have probably given them your best price, so why reduce your profit even further.
If you want your money earlier:
- then reduce the terms of the number of days to pay
- or reduce the number of days for the bad payers.
If you want to give a discount:
- it would be more beneficial to do it when they refer a new customer to you
- or when they spend more than $X dollars with you.
In other words, a reward program that gets new customers and does not affect your profit.
Here is a link to the Queensland Government Business website where they discuss setting payment terms
Effective Debt Collection Strategies
Business owners need to work smarter and put strategies in place to reduce the risk of non-payment and paid when the invoice is due. To help in collecting outstanding customer payments, Biz Skills Business courses have prepared an online lecture course Effective Debt Collection Strategies which includes a strategy to reduce the current customer debt and a strategy to collect future overdue invoices. The Phone Script Course may useful if you just want to build your confidence when phoning the customer. The Phone Script Course also deals with customer excuses and how to manage customers with cash flow problems.
To find out how healthy your debtor’s ledger system is, you can download a FREE office procedures assessment questionnaire from Biz Skills website to identify the gaps in your system. Don’t return the questionnaire for a score as no two businesses are alike. It is to stimulate your thinking so you can evaluate what sort of system you would like in your business.
Proactive Debtor’s Ledger Management
How to proactively control all the aspects of giving your customer credit. Manage cash flow and accounts receivables effectively. The Debtor’s Ledger Management Course provides strategies to achieve this and more.