Given that some retailers are offering suppliers earlier payment for a discount, it might be helpful to run the numbers and explore the financial impact on a supplier.
Assumptions
- sales of £1.5m per annum to the retailer
- current payment period 75 days, net
- Discount for 21 days settlement 5%
Customer now pays in 75 days
We want him to pay in 21 days
i.e. a 54-day reduction in payment period
Customer now pays 4.87 times per year i.e. 365/75
We want him to pay 17.38 times per year i.e. 365/21
Amount he owes us when paying in 75 days
= £1.5m/4.87 = £308,000
Amount he owes us when paying in 21 days
= £1.5m/17.38 = £86,306
Cashflow saving = £308,000 -£86,306
= £221,694
Settlement discount for 21 day payment
= 5% i.e. (5% of £1.5m = £75k)
Cost of the 5% settlement = 33.8% (£75,000/221,694) x 100
i.e. the supplier is paying 33.8% 'interest' on the cashflow saving
Assumptions
- sales of £1.5m per annum to the retailer
- current payment period 75 days, net
- Discount for 21 days settlement 5%
Customer now pays in 75 days
We want him to pay in 21 days
i.e. a 54-day reduction in payment period
Customer now pays 4.87 times per year i.e. 365/75
We want him to pay 17.38 times per year i.e. 365/21
Amount he owes us when paying in 75 days
= £1.5m/4.87 = £308,000
Amount he owes us when paying in 21 days
= £1.5m/17.38 = £86,306
Cashflow saving = £308,000 -£86,306
= £221,694
Settlement discount for 21 day payment
= 5% i.e. (5% of £1.5m = £75k)
Cost of the 5% settlement = 33.8% (£75,000/221,694) x 100
i.e. the supplier is paying 33.8% 'interest' on the cashflow saving
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