An early payment discount is a price reduction a supplier grants when an invoice is paid before its due date, commonly expressed as terms such as 2/10 net 30.
An early payment discount, also called a cash discount or settlement discount, is a reduction in the invoice amount that a supplier offers in exchange for payment before the normal due date. It is written as three numbers: the discount percentage, the number of days within which it applies, and the net term. In 2/10 net 30, the buyer may deduct two percent if payment reaches the supplier within ten days of the invoice date, and the full amount is due at thirty days.
For the supplier, the discount buys cash twenty days sooner and reduces collection effort. For the buyer, it is one of the highest return uses of idle cash available, because the percentage is earned over a very short window and then repeats. The reverse is equally true: a buyer who lets discount windows lapse is paying an implicit interest rate far above any bank line, and because the loss never appears as an expense line, it usually goes unnoticed. Discounts also change the negotiation, since a supplier quoting 2/10 net 30 has effectively priced the goods two percent higher for anyone paying at thirty days.
Business Central models this in payment terms: the code carries a due date calculation, a discount percentage and a discount date calculation, and posting an invoice stamps the resulting payment discount date and discount amount on the vendor or customer ledger entry. The Suggest Vendor Payments function in the payment journal can be run so that it finds payment discounts, selecting invoices whose discount date falls within the horizon rather than only those approaching the due date. General ledger setup adds a payment discount grace period and payment tolerance, and general posting setup holds the accounts where discounts received and discounts granted are booked. What the system does not do is judge whether a discount is worth taking against your own cost of capital, or rescue a discount already lost because the invoice sat unapproved for two weeks.
On a 50,000 EUR invoice with terms 2/10 net 30, paying on day ten costs 49,000 EUR and paying on day thirty costs 50,000 EUR. The saving of 1,000 EUR is earned on the 49,000 EUR actually paid out, so the return is 1,000 divided by 49,000, which is 2.0408 percent, for the twenty days of financing given up between day ten and day thirty. A 365 day year contains 18.25 such twenty day windows, so the simple annualised rate is 2.0408 times 18.25, which is 37.2 percent; compounding the same 2.0408 percent over 18.25 periods gives roughly 44.6 percent. Either figure sits far above the cost of a normal working capital facility, which is why the discount is usually worth taking.
Discounts are usually lost inside the company rather than refused deliberately: the invoice arrives on day one, reaches an approver on day nine and clears matching on day twelve, two days after the window closed. Two other traps are worth knowing. A credit memo received after a discounted payment leaves a discount calculated on a base that no longer exists, which is why Business Central has a setting for calculating payment discount on credit memos. And in several European VAT regimes a discount taken reduces the taxable base, so the tax has to be adjusted, which is what the adjust for payment discount settings are for; check the treatment in your country before switching them on. The metric to watch is the capture rate, discounts taken divided by discounts available. Since the constraint is elapsed time rather than intent, tools that draft the purchase invoice from the PDF on the day it arrives, such as Zentriq Document Capture, move that number, though a person still reviews and posts.
Almost always, when the annualised equivalent exceeds your cost of borrowing and the liquidity is there. The exception is a cash constrained period, where preserving liquidity can matter more than a high notional return.
Two percent may be deducted if payment is made within ten days of the invoice date, and the full amount falls due after thirty days. The gain is therefore two percent in exchange for giving up twenty days of financing.
Zentriq's AI tools automate many of the manual processes around early payment discount in Business Central. Learn about the Zentriq Agent or try Zentriq PunchOut to see how AI simplifies procurement in BC.