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I had a 1099-C for about $135,000. My husband didn't have any withholding on Social Security. His employer couldn't withhold due to incompetence. I felt utter dread wash over me. Memories of owing the IRS before were constantly on my mind. I called a local CPA. Besides being clueless, he wanted to charge me for every question I had about insolvency. I looked on line and found little hope of the countless stories of permanently disabled people like myself getting their student loans forgiven only to be asked to pay taxes on it as if it were income.
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QuickBooks CPA Explains Vendor Discounts including an example

CPA Wilmington NC discusses vendor discounts

An CPA example of a 2/10 vendor discount using Wilmington NC Widgets.

QuickBooks CPAs recognize good bookkeeping helps with cash flow. Good cash flow has many rewards like Vendor Discounts.

“2/10 net 30” means take off 2% if you pay within 10 days, or, remit the full amount in 30 days. Let’s take a look at the cash flow implications of this vendor discount from the perspective of  QuickBooks CPA, our example company. Most vendor also impose financing charges if you pay after the 30 days.

Carrot and Stick: Vendor Discounts and Finance Charges

This vendor discount is truly one of the rewards of good cash management. It amounts to about a 36% APR savings for QuickBooks CPA, on its average annual vendor balance. Really, a very nice carrot.  For a dramatic example, let’s say QuickBooks CPA has an invoice for $100,000. QB CPA could wait for 30 days and then pay the full $100K. And might have to if QuickBooks CPA has cash flow problems. Waiting longer than 30 days usually incurs financing charges by the way. But paying within the 10 days means only remitting $98,000, saving $2,000.

An Example of a Vendor Discount APR Calculation

So, QuickBooks CPA takes advantage of the vendor discount and saves $2,000 by paying the $98K due 20 days early. For convenience in calculations, let’s call it $100K, for 20 days, and say there are only 360 days in a year. 360/20 = 18. 18 x $2000 = $36,000.  36K/100K = 36%. Roughly. Combine this discount with paying by credit card, and you could have up to 40 days, not just 10, to pay 98% of the invoice. So taking that 2/10 vendor discount is a great deal. Having the cash flow to take advantage of it is good management.

More About Carrots and CPAs

There are few investment opportunities in America that guarantee a return of 36%, even with risk.

  • The 10 day limit takes discipline and good bookkeeping procedures to meet it.
  • First, the timer usually starts from the date of the invoice, so you lose a few days if the vendor mails it. Ask your vendor for e-mail invoices, or, just anticpate the bill in QuickBooks using a purchase order.
  • Next is QuickBooks CPA’s turn around time, which includes due diligence in validating the order, cutting the check etc.

So taking the discount isn’t always easy.

Why would the vendor give up the 2%? 

QuickBooks CPA has to be meet  the vendor’s criteria for offering a 2/10 discount, like reliability, quality, response time etc.

  • Their CPA may not like running a large accounts receivable.
  • Collecting most of your money now is better than spending money to collect on the invoice later.
  • Maybe they have cash flow problems.
  • Perhaps this is a customer loyalty incentive extended to QuickBooks CPA.
  • Maybe it’s reward for being a high volume customer.

Even More About Sticks

Unfortunately, as a CPA, I sometimes see clients not taking advantage of the 2/10 vendor discount, AND, paying 18% APR finance charges for paying later than 30 days. The double whammy. Decreasing the bottom line from two directions. So, these vendor cash discounts, when offered, represent real savings.

We’re a QuickBooks CPA firm with a virtual office to serve companies regardless of where they’re located. For a free initial consult please call  (910) 399-2705.

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4 comments to QuickBooks CPA Explains Vendor Discounts including an example

  • Davis Markton

    For years I thought paying vendors as late as possible was the best strategy even tho we keep good cash surpluses. But this makes sense and I’ll run it by my CFO. Great article, thanks.

  • C.H.H.

    I’ve been so bogged down trying to grasp the concept of vendor fees for my new small business here in Wilmington! Opening up your own small business is hard enough in this economy. Your simple example really helped me apply it to my own situation. Thanks so much!

  • Constance T.

    LOL. Boy, have I been doing it wrong in my business! Thanks for the info on vendor discounts. I will be changing my modus operandi this week.

  • Sweet site, super design , real clean and use friendly .

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