Supplier Early-Payment Discounts: Compare Savings and Cash Cost
Compare an early-payment discount with the actual cost of giving up cash for those extra days. Check the discounted amount, payment deadline, borrowing fees and the lowest projected bank balance. Annualising the discount helps compare timing, but it is not an investment return or a reason to leave the business short of cash.
What you’ll get from this guide: Check one supplier discount against its financing cost and the business cash floor.
- Calculate the saving in dollars before annualising it.
- Use the discounted payment and actual days advanced for financing costs.
- Test the lowest cash balance between the two payment dates.
Use this worksheet when a supplier offers a specific discount for paying sooner. Bring the written offer, accepted invoice, original due date and a current cash forecast. Verify the invoice and payment details through your established process before considering speed.
Confirm the two payment options
The fictional invoice is $10,000, payable on day 30. The supplier offers 2% off if $9,800 is received by day 10. The saving is $200 and the money leaves 20 days earlier. These figures use an agreed discount basis with no additional tax cash effects in the example; your bookkeeper should check the actual credit and GST records.
Assumptions: Fictional Australian-dollar management example. Revenue and costs exclude any recoverable GST; non-recoverable tax is included in costs. No GST entitlement or income-tax deduction is assumed for your business. Contribution is before unallocated overhead and income tax. The 12% rate is fictional, not a lender quote. Financing cost is modelled only for the extra 20 days; no fees, compounding or further tax effects are included.
| Measure | Normal payment | Early payment |
|---|---|---|
| Payment date | Day 30 | Day 10 |
| Amount paid | $10,000 | $9,800 |
| Saving | $0 | $200 |
| Cash committed earlier | None | $9,800 for 20 extra days |
| Illustrative financing interest | Baseline | $64.44 at 12% p.a. simple interest |
| Saving after this interest | $0 | $135.56 before fees |
Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.
Interest for those extra days is $9,800 × 12% × 20 ÷ 365 = $64.44 after rounding. A $50 facility fee would reduce the saving to $85.56. Use the actual facility's charging method and all incremental fees rather than assuming this simple calculation matches a real contract.
Use an annualised figure carefully
The 20-day saving relative to the $9,800 advanced is $200 ÷ $9,800 = 2.0408%. A simple annualised comparison is that ratio × 365 ÷ 20, approximately 37.24%. A compounded equivalent is (1 + 200/9,800) raised to (365/20), minus 1, approximately 44.6%.
ACCA's discount analysis explains why the amount received or paid early and the days advanced matter. These annualised figures express the price of the timing difference. They do not mean you can repeatedly earn that return, and they do not make borrowing suitable for the business.
Check the cash floor between the dates
Assume the business has $15,000 on day 10 before this payment. Before day 30, other payments total $5,000 and receipts total $4,000. For a conservative timing case, all the other payments leave before those receipts arrive.
Assumptions: Fictional Australian-dollar management example. Revenue and costs exclude any recoverable GST; non-recoverable tax is included in costs. No GST entitlement or income-tax deduction is assumed for your business. Contribution is before unallocated overhead and income tax. This cash-only table is a separate scenario from the borrowing example. The owner-selected $3,000 floor is not a benchmark. No other cash movements occur.
| Point in the schedule | Wait until day 30 | Pay early from cash |
|---|---|---|
| Day 10 after supplier decision | $15,000 | $5,200 |
| After other $5,000 payments | $10,000 | $200 |
| After later $4,000 receipts | $14,000 | $4,200 |
| After day 30 supplier payment | $4,000 | $4,200 |
| Chosen operating floor | $3,000 | $3,000 |
Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.
The early option ends $200 better but falls to $200 before receipts arrive, $2,800 below the chosen floor. The end-of-month balance would hide that shortfall. If financing is considered, model its drawdown, interest and repayment in a separate complete schedule; do not mix borrowed and cash-funded cases.
Record the decision and evidence
Confirm when cleared payment must arrive, which invoice lines qualify and how the supplier records the discount. Do not claim it by paying short without agreement. Use the supplier payment-run worksheet and cash-buffer guide before approving the payment.
Where to get help
Ask your bookkeeper to confirm invoice and credit treatment and your accountant or licensed adviser to review unfamiliar finance terms. The pricing and profit hub connects payment decisions with product costs and sourcing comparisons.
Where to go from here
Make or Buy? Compare Avoidable Costs and Released Capacity
Compare sourcing costs and the use of released capacity.
3 min readBuy or Lease Equipment: Compare the Total Commitment
Compare the full purchase and lease commitments.
3 min readPrepare a Supplier Payment Run You Can Afford
Explore a related question linked in this guide.
3 min read
General information only. This guide doesn't take your personal or business circumstances into account and isn't financial, legal or tax advice. Rates and thresholds change — check the official sources linked in this guide and get qualified advice where your circumstances require it.