Business owners and finance managers realize the importance of managing the receivables of a business. Businesses that have a mechanism to motivate their customers to pay on a timely basis are far less likely to have expenses due to the write-off of a bad debt than those businesses that have no mechanism to motivate their customers in that way. There are key advantages to offering a trade discount.
Cash Flow Improvement
The most important advantage of offering a trade discount is the potential improvement of cash flow for the business. Businesses that offer a trade discount generally shorten the average collection period of their receivables, which translates into working capital being received by your business in a shorter amount of time. A higher average collection period means that your business has more funds tied up in its receivables and will not have as much cash available at any certain time to cover the expenses of the business.
Trade discounts are an incentive for a customer to do business with you. Trade discounts can also be an incentive for a customer to cease doing business with his current trade partner to do business with you. This is especially true for small businesses that do not necessarily qualify for quantity discounts, but would benefit from having a small discount on the list price in the form of a trade discount.
Balance Sheet Improvement
A business that offers a trade discount to its customers has the potential to improve the condition of its balance sheet. Customers who pay an invoice early due to receiving a trade discount provide the seller with cash. Additionally, the prompt payment reduces the receivables balance in a more timely fashion. By increasing the cash balance and decreasing the receivables balance, sellers strengthen the asset portion of their balance sheet.