Businesses often use discounts to reward customers for loyalty, large orders or prompt payment. When these transactions take place between wholesalers and retailers, or between manufacturers and suppliers, they are known as trade discounts. One common type of trade discount is the cash or sales discount -- a percentage reduction in price awarded for prompt payment. These discounts are expressed in conjunction with the term, or due date, of the invoice in an "x/y, net z" expression.
Definition of Variables
A "x/y, net z" expression includes three variables: a discount (x), the period for which the discount is valid (y), and the point when the full amount of the invoice is due (z). In the case of a "2/10, net 30" expression, the discount is 2 percent, the valid period is 10 days, and the whole invoice is due in full within 30 days. Calculate all dates using the date of the invoice. In other words, if the customer pays the invoice within 10 days of the invoice date, he receives a 2 percent discount. Otherwise, the full balance is due in 30 days.
Taking the Discount
In most cases, sellers outline the discount and terms on the order invoice. It is the customer's responsibility to calculate the discount and pay the bill appropriately. Customers do not need permission to take the discount -- the smaller payment amount indicates they have accepted the discount.
First, ensure that you are within the time period for the discount by adding the number of days to the date on the invoice. For an invoice dated Nov. 30 with the terms as 2/10, net 30, payment by Dec. 10 qualifies for the discount. In this case the discount is 2 percent, so multiply the total bill by 0.98, to determine the amount of payment.
Invoices with longer payment periods may have step-down discounts, such as "5/10, 2/30, net 60". In this case, the buyer may take a 5 percent discount for payment within 10 days and a 2 percent discount for payment made in 11 to 30 days. Otherwise, the full invoice is due in 60 days.
Nola Moore is a writer and editor based in Los Angeles, Calif. She has more than 20 years of experience working in and writing about finance and small business. She has a Bachelor of Science in retail merchandising. Her clients include The Motley Fool, Proctor and Gamble and NYSE Euronext.