Accountants - Effect of Early Payment Discount Terms

[Tidybuoy]

I've been searching for a website that will calculate the effect of offering early payment discount terms but have not found any that are easy to understand.
Does anyone have a recommendation?

I hate it when Giant customers (like Costco/WalMart, etc) dictate payment terms.

I have a new customer that wants one of the following - Our normal terms are Net30.

Customer wants either:
Net 60
2%-15, Net 60
1%-30, Net 60

I want to calculate the effects and then adjust my pricing to them to cover theses but I'm not sure how to calculate.

Average Invoice = 150,000, my line of credit interest rate = 3.8%

[petrolhead611]

Not an accountant, but this is simple arithmetic.
3.8/12= your borrowings monthly interest cost., rounded up that is 1/3rd of a percent.
Your customer is asking you for 1% discount for 1 month settlement, or asking you for nett at 2 months. That is costing you either 1/3% or 2/3%.You also take the increased risk that they wont pay. On the other hand the 1% should encourage them to pay on time.

[Tidybuoy]

My calculation: based on $100,000 invoice and my cost of funds @3.8%
Net 60 = Cost's me $634.34 or 7.983%
2%-15 = Costs me $2,000 or 52.143%
1%-30 = Costs me $1,000 or 12.583%

I am not worried about a customer not paying. We have a sales contract and any non-payers do not get their next order shipped if delinquent. I rarely have any bad debt customers. In general, I always take discounts but rarely give them.

[Bob Kontak]

You calcs are right w/o splitting hairs. 2%-15 is banking you don't have a line of credit and you need the cash.

$73,000 for one year on 150K. That's a good discount.

[red-beard]

You are simply looking at the "cost of capital". We had some similar issues, but you may want to factor in what you could have done with that capital. Is the extension preventing other business?

[Tidybuoy]

Originally Posted by red-beard

You are simply looking at the "cost of capital". We had some similar issues, but you may want to factor in what you could have done with that capital. Is the extension preventing other business?

I was mostly wanting to compare the costs between the different discount rates and was hoping to find an on-line calculator that would make it easy.

In my case, "what I could have done with that capital" doesn't really apply here because I'm going to add that discount cost to the purchase price. My company produces food (roasted almonds, etc) and when I price my products, everything that goes into that product (including overhead) goes into the price, then add profit.

I hate it though, when big companies demand a discount. I wish they would all just get in line and go with the flow - Net 30, that's how I'm paying my suppliers.