Terms of payment

There are many ways in which sellers try to attract buyers. Giving discounts is an attractive way of doing so. There are two main types of discount given.

Cash discount

Cash discount is given to encourage prompt payment. Cash discount is a deduction from the invoice price of goods bought on credit. The payment has to be settled within a given period of time. If the buyer fails to settle the payment by the given due date, the discount is forfeited.

Cash discount is sometimes given as a reward for the buyer when he immediately pays in cash – cash purchase.

Advantages to the seller of giving cash discount

  • The bills are settled promptly and thus reducing bad debts. In this way, the cash flow is also improved. The cash flow can be used to buy more stock or to pay his own bills.
  • This money can be used by the seller to get cash discounts from his own suppliers. Otherwise he might have to get goods on credit.
  • Giving cash discount may create customer loyalty

Advantage to the buyer
The main advantage to the buyer will be the reduced cost of goods he purchased. His margin will be higher if he resells the goods too.

Trade Discount

  • This is a deduction off the list price of goods purchased.
  • This is given to encourage bulk purchases.
  • The rate of trade discount depends on the quantity purchased.
  • Buyer is entitled to the discount even if he fails to pay within the given period.

Mark-up

Mark-up is the cash difference between the product’s cost price and its selling price i.e the gross profit.

Mark–up is the gross profit as a percentage of cost of goods sold.

Mark-up =  (Gross profit/cost of sales) X 100

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