2/10 net 30: what an early-payment discount is really worth

“2/10 net 30” on a supplier invoice means: take 2% off if you pay within 10 days, otherwise pay the full amount within 30. It reads like small change. It isn't.

Work out the annual rate

Paying on day 10 instead of day 30 means paying 20 days early. On a £10,000 invoice you pay £9,800 instead of £10,000, so you earn £200 for parting with £9,800 for 20 days. As an annual rate:

2 ÷ 98 × 365 ÷ 20 = 37.2%

The same formula for other common terms:

• 1/10 net 30: 1 ÷ 99 × 365 ÷ 20 = 18.4% a year
• 2/10 net 30: 2 ÷ 98 × 365 ÷ 20 = 37.2% a year
• 2/10 net 60: 2 ÷ 98 × 365 ÷ 50 = 14.9% a year
• 2.5% within 14 days, net 30: 2.5 ÷ 97.5 × 365 ÷ 16 = 58.5% a year

Compare the result with what your cash costs: your overdraft rate if you would borrow to pay early, or what the money earns in the bank if you wouldn't. A discount worth 37% a year beats almost any business overdraft. One worth 15% might not, if cash is tight.

Why discounts get missed

• The terms aren't seen. The discount is printed in small type at the foot of the invoice and never reaches the person who pays.
• Approval takes longer than the window. Ten days from the invoice date is gone if the invoice sits in an approval queue for two weeks.
• The payment run is fortnightly. A run every other Friday misses any window that opens and closes between runs.
• The clock starts earlier than you think. The days usually count from the invoice date, not the day the invoice reached you.

How to capture more of them

1. Record each supplier's discount terms on the supplier, so they are known before the invoice arrives.
2. Put the discount deadline on the bill, and approve discount invoices first.
3. Run payments weekly, or add a short run for invoices whose discount is about to expire.
4. Check what you took. Compare the payment date with the deadline each month and count what you missed.

VAT when you take the discount (UK)

Since 1 April 2015, VAT on a supply with a prompt payment discount is due on the amount actually paid, and the customer may only reclaim the VAT actually paid (HMRC VATVAL08500; VAT Notice 700, paragraph 7.3.2). The supplier either issues a credit note when you take the discount, or prints the discount terms on the invoice with a statement that no credit note will be issued.

For example: an invoice for £5,000 plus £1,000 VAT, with 2% off the full price for payment within 10 days. Paying in time, you pay £4,900 plus £980 VAT. Without a credit note, the bill in your books still shows £1,000 of VAT, so adjust it to the £980 you paid before the VAT return.

How Tenet handles it today

Tenet reads the payment terms printed on each invoice and shows them on the invoice for the approver. It checks that the due date fits terms such as “Net 30”; for “2/10 net 30” that means the 30 days. Tenet doesn't yet work out discount deadlines or the saving. Approval reminders flag invoices waiting more than three days, which helps keep discount invoices inside their window. See why invoices stall in approval.