Note: In Table 1, average accounts receivable is computed as a weighted average of the accounts receivable for the month.
Cost of the trade discount is computed as follows: percent of patients/owners taking discount x monthly sales x discount percentage
x 12 months.
Based on the figures of our hypothetical practice, offering no discount has the smallest impact on the bottom line, reducing
profits by $2,750. Offering a 2 percent discount is the most costly, reducing the bottom line by $5,417.
From the cash-flow perspective, a lower average investment in accounts receivable means a quicker inflow of cash. Offering
the 2 percent discount significantly reduces the practice's average investment in accounts receivable. This option would have
the most favorable impact on cash flow problems.
Naturally, offering no discount is the most profitable, but does nothing to increase cash flow. Offering the 2 percent discount
would significantly increase cash flow but at the expense of the bottom-line profit.
Obviously, in this situation, a 1 percent discount reduces the practice's bottom line by only $583, a small sacrifice for
an $8,334 increase in cash flow.
Profiting from supplier discounts
If a supplier offers payment terms extending beyond 30 days, it may be more advantageous to skip the discount and delay payment
until the full amount is due.
Generally, however, veterinarians should take advantage of discounts of 1 percent or more when offered by suppliers requiring
full payment within 30 days.
To decide, compare the amount saved by taking the discount to the cost of borrowing money to make an early payment.
Naturally, the amount of the discount and the time in which it is available can vary greatly. Usually, trade discounts are
based on what is common for the supplier's line of business. Some may offer a generous discount, others none at all.
One step further
Supplier discounts can be negotiable. Consider the potential rewards:
Many professionals have realized significant savings by negotiating standard payment terms of 30 to 45 days. Others have encouraged
suppliers who did not normally offer discounts to give one in return for immediate payment, or by paying a bit more slowly
when they did not.
In other words, some veterinarians created their own payment terms.
So, does it make sense to routinely overlook or ignore discounts? The answer should be obvious.
Battersby is a financial consultant in Ardmore, Pa.