Question

Companies sometimes offer their customers a discount on their purchase if they pay early. What is the benefit for the company to take a reduced amount on these purchases and from the customer’s point of view is it beneficial for them to take the discount. What factors does the customer have to consider when deciding to take the discount?

Answer 1

Yes, companies give discount if the customers pay early.

Following this activity in business organisations it is beneficial to both organisation and customer

Benefits to the organisation or company

1. Early completion of accounts receivable cycle

2. Availability of working capital funds

3. Reduction of interest payments on loans taken for working capital

4. Discount to customer increases the customer loyalty and customer satisfaction.

Benefits to the customer :-

1. Reduction in price of product

2. increases credibility of the person from the point of view of company.

3. Availability of more credit in further transactions or business deals.

4. Quick payment of credit improves the customer and supplier relationship.

Factors does customer have to consider when deciding to take the discount :-

1. Risk free interest rate in the market

2. Availability of short term investments

3. Comparison between the discount for the early payment and interest rate on risk free investments for the period of quick payment. if discount is higher than rate of interest then customer avail discount by paying early.

if rate of interest is higher than the amount of discount then such funds will invested in risk free investments for the period of quick payment.

comparison of both discount and risk free rate of interest is very important factor before deciding whether to take discount or not.

These are all the benefits of giving discount on early payment of credit towards the company as well as towards the customer.

If there is any clarification required regarding the above provided answer, please mention them in comment box.

I hope, all the above mentioned information explanations are useful and helpful to you.

Thank you.