The vendor responds with some incentive such as Free Freight, a percentage discount, or extended credit (net 60 instead of net 30 days for instance) if the order is large enough.
If given the choice, which should you choose?
Most retailers jump on the Free Freight. And they would be smart. With shipping costs the way they are, freight bills run from 12% to 20% the cost of the goods. That's a major savings.
Most retailers, though, ignore the extended dating. It is hard to quantify what an extra 30 days to pay actually saves.
Unless, like me, you've done the math.
Doing the Math
Extending your payment terms from Net 30 to Net 60, in terms of cash flow, is the equivalent of a 15% discount. In other words, it's just as good for your cash flow as Free Freight, and far better for your cash flow than a 3% or 5% discount.
The key lies in the phrase for your cash flow.
If you are under a cash flow crunch, you should look at trying to extend your payment terms in lieu of any discounts under 12%. It will help you out far more than the 2-3% or 5% or even 10% discounts offered.
But if your cash flow is already strong, take the discounts. The one shortfall of extended dating is that it does nothing for the bottom line. Freight is an expense so Free Freight decreases your expenses. Discounts lower your Cost of Goods Sold. Extended dating merely helps cash flow.
Discounts or Dating?
- If you need cash flow, choose the extended dating.
- If you need profit, choose the discounts.
- If you can get Free Freight (which helps both) take it
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