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MasterMath

Early Payment Discount Calculator

Two per cent for paying in ten days instead of thirty sounds trivial and works out at around 37 per cent a year. This calculator puts that number on it, and that is the number that decides.

Currency and number format for

Annualised cost of not taking it

—

Annualised cost of not taking it—
Compounded—
You save—
You would pay—
Days you bring the payment forward—
Conclusion—

How this was worked out

    The formula

    Annual cost = discount / (100 − discount) × 365 / days gained

    Where it comes from

    Turning down the discount is, in effect, borrowing the invoice amount for the days you delay paying, and the interest on that loan is the discount you forfeited. Because the term is so short, annualising sends the percentage soaring: 2 % over twenty days is almost twenty cycles a year. That is why the answer is nearly always to take it, even if you have to borrow to pay early.

    How to work it out by hand

    1. Work out the discount against what you actually pay: discount ÷ (100 − discount)
    2. Count the days you bring the payment forward: normal term minus discount term
    3. Divide 365 by those days: that is how many cycles fit in a year
    4. Multiply the two to get the annualised cost

    What is worth knowing

    The simple version, the one that gets taught, multiplies; the effective one compounds and comes out higher, because it assumes reinvesting the saving each cycle. Both lead to the same conclusion. The comparison to make is against the cost of your own financing: if your credit line is at 8 % and skipping the discount costs 37 %, drawing on the line to pay early pays off. Conversely, a supplier offering these discounts is financing themselves very expensively.

    Frequently asked questions

    Why is the percentage so high?

    Because a discount earned over twenty days is being annualised. Almost twenty cycles fit in a year, and each returns that 2 %.

    Is it worth borrowing to take it?

    If the loan costs less than the percentage shown here, yes. And it almost always costs a great deal less.

    What does 2/10 net 30 mean?

    Two per cent off if you pay within ten days, or the full amount at thirty. It is the standard invoice notation.

    Simple or compound?

    Simple is the conventional figure and compound is more exact. Both lead to the same decision.

    I am the one offering the discount — what does this tell me?

    That you are financing yourself at that rate. If it is dearer than your bank, it may not be worth offering.