Trade and cash discounts are an important business tool, and you will often find yourself on...

Trade and cash discounts are an important business tool, and you will often find yourself on different sides of this, giving or receiving discounts. Remember, though, that these trade and cash discounts are either money given away entirely that you will never see or extensions of credit. You should never borrow 100% for everything nor is it a good idea to pay 100% cash all the time. If you are unsure as to why, go back and look at the Cash Flow discussion from Week 2. The question, though, is how comfortable are you with discounts? Would you rather take a discount for early payment or hold the cash for other uses and pay the full price? What are the advantages and disadvantages of each approach? Give some examples of when you might choose to do either of those.

Expert Solution

The asnwer of this question lies with your firm financial situation.

If I have any extra free cash which I am not going to use till the payment date then I would like to pay the cash early and avail the discount. In this way my idle cash will generate some return to me.

But if my firm's financial situation is tight and we need free cash to float our firm then I would prefer to keep those cash and pay the full price at payment date. This will make my firm to sustain in near future and I can make money in menawhile with my existing cash.

Advanatage of first approach to avail discount is that you will get the product in cheaper rate. But it has its disadvantages as well like you may get product of inferior quality, it will take time to get back the money for bad product and incorrect quaniity of product. It will be risky if they won't return the money.

Advantage of paying at last date at full price is that you will assure of quality and quantity of product, so it minimize your risk in respect to the product. But at the same time you need to pay extra more.

When you have extra cash and trusted vendor then you can choose either of those method because if you want to avail the discount you can do that or you can just wait for the delivery and pay full price.

jeff jeffy answered 2 years ago

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