Free tool
Work out due dates and the true cost of an early payment discount like 2/10 net 30.
Why it matters
Payment terms decide when cash leaves. Moving from 14 to 30 days frees up 16 days of purchases. That is cash you can use for stock or wages.
Terms also affect supplier trust. A supplier who is paid on the agreed day is more likely to look after you when stock is short.
The steps
- Check what you can get. Ask for 30 days from invoice date. For a new supplier you may start on cash on delivery or 7 days until they know you.
- Check any rules that apply to you. The Payment Times Reporting Scheme asks large businesses to report how quickly they pay small business suppliers. Check the scheme site to see whether it applies to you or to your customers.
- Weigh any early payment discount. A discount like 2/10 net 30 means 2% off if you pay in 10 days, otherwise the full amount in 30. Work out the annual rate before you take it.
- Write the terms down. Put the terms on the purchase order, the supplier agreement or the account application. Say whether days count from invoice date or month end.
- Set the terms in your accounting system. Enter the terms against the supplier so due dates are set when bills are entered. Check each due date on the bill itself.
- Review the terms each year. Ask for better terms when your spend grows. Keep a list of terms by supplier.
Worked example
Example Hardware Pty Ltd is offered 2/10 net 30 on a A$10,000 invoice.
| Item | Working |
|---|---|
| Discount if paid in 10 days | A$10,000 x 2% = A$200 |
| Cash paid in 10 days | A$9,800 |
| Days you give up by paying early | 30 less 10 = 20 days |
| Return on the A$9,800 | 200 / 9,800 = 2.04% over 20 days |
| Annual rate | 2.04% x (365 / 20) = about 37.2% |
A return of about 37% a year is higher than most borrowing costs, so taking the discount makes sense if you have the cash.
Common mistakes
- Not writing the terms down, so the supplier and you disagree about the due date.
- Taking a small discount without working out the annual rate.
- Paying early with no discount, which gives away free credit.
- Forgetting that terms count from invoice date, not delivery date, unless the agreement says so.
Next step
Use the Payment terms calculator first. Then see the guide to getting invoices in.
Sources
Common questions
What does net 30 mean?
The full amount is due 30 days after the invoice date.
What does 2/10 net 30 mean?
You can take 2% off if you pay within 10 days. Otherwise pay the full amount within 30 days.
Can a supplier charge interest on late payment?
Only if your agreement says so. Check the agreement before you assume a rate.
Related how-to guides
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