Cash Discounts vs. Dynamic Discounting Benefits
- Money transfer
2% cash discount if the invoice is settled within 10 days or 30 days – accountants are confronted with this decision every day. Above all in the DACH region, cash discounts are common.
Essentially, a cash discount is a price reduction for early payment. In addition to cash discounts, large companies are now increasingly offering their customers dynamic discounting benefits.
Cash and dynamic discounting benefits at a glance
Not only buyers, also the company offering the discount can benefit from advantages:
- Increase in liquidity, as early payment is rewarded
- Improvement of the customers’ payment morale
- Higher customer loyalty
Despite the advantages of offering discounts, a company should always be aware of the associated costs. If the discount is not included in the final selling price, this will have a direct impact on the profit. In some cases, an alternative financing solution may be more favorable.
What are the differences between cash and dynamic discounts?
Dynamic discounting follows the same logic as cash discount: Customers are rewarded with a discount for early payment.
The following table shows an overview of the most important differences:
| Cash Discount | Dynamic Discounting | |
|---|---|---|
| Process | Cash discount is usually specified in the terms of delivery. This means that the same conditions apply to all invoices. | Discount is offered on an invoice basis. |
| Discount gradation | There is only one discount level. It does not take into account on which day within the payment period a customer pays. For example, the identical discount percentage is given on day 1 and day 9, provided the payment is made within the given payment period. | The discount amount can be defined as desired and is calculated to the day, i.e. dynamically. For example, a discount of 2% for a payment period of 60 days is calculated as follows: - Payment day 1: 2% discount - Payment day 15: 1.5% discount - Payment day 30: 1% discount |
| Calculation | Fixed percentage for payment before a certain day (2% discount 10 days). | Dynamic percentage for payment within the payment period. |
| Flexibility | Little flexibility, as typically delivery terms are not adjusted on an invoice basis. | Very flexible, as different discount levels and different payment terms can be offered on an invoice basis, or a discount can be waived altogether. |
In contrast to a cash discount, with dynamic discounting the price reduction is determined dynamically. Sounds complicated, but with the appropriate software solution, for example with amnis, it is quite simple.
Example of a dynamic discounting solution
amnis enables small and medium-sized businesses to take advantage of dynamic discounting free of charge.
With one click, the feature can be activated in the WebApp and a dynamic discount can be offered to customers on an individual basis. The customer will be informed about the discount offer via email and also the rest of the process is automated: on the day your customer settles the invoice, amnis automatically calculates the amount to be paid, including the discount you granted:
Conclusion
The flexibility of dynamic discounting makes it possible to optimize your company’s liquidity in a targeted manner, as the conditions can be adjusted quite easily for selected invoices. However, dynamic discounting is usually more complex, as the discount can only be granted digitally and additional software is usually required to calculate the amount to be paid in real time. In the case of cash discounts, on the other hand, an additional sentence on the invoice is sufficient; however, the individual customization options are limited.