Many companies reward customers who pay their bills quickly by granting them a discount. It is not a company’s duty to provide this discount. It is at the discretion of each company whether or not to grant such a discount when paying the bills at short notice.
What is a discount?
According to definitionexplorer, the discount is therefore a price reduction, a reward for quick invoice settlement. The term comes from Italian and literally means “deduction” or “discount”. This is the discount granted for a quick payment. In order to be granted this, the invoice must be paid within a certain period of time. Usually this payment period is only a few days. If you want to write a legally compliant invoice as an entrepreneur , you have to observe some legal components and mandatory information. If you have a discount or a discount-like discount would like to grant, you have to indicate in the invoice the payment period in which you grant the discount. As a rule, entrepreneurs then formulate the payment terms as follows:
The invoice amount is payable net within 14 days without any deductions. If you pay within 5 days, we grant a 2% discount.
In addition, you must specify the amount of the discount on prompt payment in percent and the amount of money for the discount. So you don’t leave the calculation to the customer, but state the final amount minus discount. A company that grants such a discount on the invoice amount must calculate accordingly when determining the price. A discount rate applies to the payment that can be used within the specified number of days. A common discount rate is, for example, 2 or 3 percent. However, the amount is at the biller’s discretion.
Important terms about the discount
In connection with the issue of discount, the same terms appear again and again. However, these terms are often used in a misleading way or in the wrong context. The following overview defines the most important terms:
- Payment term: The payment term defines the terms of payment that deviate from the general sales law. The debtor is practically granted a loan by setting a payment term.
- Discount period: The discount period denotes the period within which a price reduction is granted. The discount period is always shorter than the payment term.
- Discount rate: The discount rate provides the percentage of the discount.
- Discount amount: The discount amount defines the specific amount of the price reduction resulting from the application of the discount.
- Target purchase: A target purchase is the purchase for which a payment term or a deferment of payment is granted.
- Supplier credit: The supplier credit is the supplier’s credit to the customer in the form of a granted deferred payment.
Calculation basis for discount
If you want to create an invoice , you have to take into account the assessment basis for the discount. Usually this is the turnover at a target sales price including sales tax . The discount is therefore granted on the gross sales, but it can also be granted on the net sales from time to time. However, this must not happen if you are billing a private household. End consumers must be granted the discount on the gross price, as they are not entitled to deduct input tax.
The full invoice amount is not always the basis for assessment and calculation. In the case of craftsmen’s bills in particular, the discount can only be granted on the pure material costs. The tax base can be freely negotiated. The price reduction for prompt payment and its calculation basis can already be shown in the offer. These can be made palatable to potential customers as an incentive. If the discount does not refer to the gross invoice amount or not to the full invoice amount, this must be stated on the invoice so that customers have clarity.
Which discount rate applies?
The discount rate is given in percent, usually and for historical reasons it is two to three percent. However, it can also be staggered, depending on the time in which an invoice is paid. A discount is a short-term (in the sense of a few days) supplier credit that can be attractive to customers.
Calculation of the interest rate for a cash discount
In order to be able to determine the advantages and disadvantages of a discount, the effective interest rate of a supplier credit must first be calculated and compared with the loan interest. This can be calculated using this formula:
((target sales price / discount sales price) 1) * (360 / (payment target discount period))
If it turns out when using the formula that the calculated interest rate is above the bank’s overdraft facility, this is not recommended to use the supplier credit.
The gross or net cash discount can also be calculated .
Historical significance of the discount in Germany
When the “old” discount law was still in force in the Federal Republic of Germany, the discount was the only allowable discount that entrepreneurs were allowed to grant to private consumers when making payments. The legislature once limited the amount of the discount to 3 percent. The old Discount Act of 1933, which was only abolished without replacement in 2002 under pressure from the European Union, excluded further discounts as anti-competitive.