Definition: A cash discount, also called a purchase discount or sales discount, is a reduction in the purchase price of a good because of early cash payment. In other words, the seller of goods is willing to reduce the price of the goods if the buyer is willing to pay for the good earlier.
What Does Cash Discount Mean?
Most businesses, especially manufacturers, sell goods to other businesses on account. This means that a retailer can buy inventory from its supplier on the first of the month and not actually pay for the goods until the end of the month. This inventory is bought on account.
Most businesses have credit terms for purchases on account of 2/10, n/30 or 2/10, net/30. These terms give the buyer an additional two percent discount if they pay for the goods in full in the first ten days after the order was placed. If the buyer doesn’t pay for the goods in the first ten days, the entire purchase price must be paid in 30 days.
This 2 percent discount is good for the buyer and the seller. Since the buyer is receiving its inventory for 2 percent less, it can earn a 2 percent higher gross profit. The discount is good for the seller because it receives the cash from the transaction faster. In most businesses, cash flow is a problem. If companies can do something to improve their cash flow, it is usually worth it.
Cash discounts are usually called purchase discounts from the buyer’s perspective and sales discounts from the seller’s perspective.