How Much Is a Vendor Discount Worth?

If you have the cash flow available to pay on discount date…

If you borrow from line of credit to pay on the discount date…

If you withdraw savings to pay on the discount date…

Discount %

Annual interest rate charged on borrowed funds

Annual interest rate paid on savings account deposit

Days between end of discount period and end of net period

Invoice amount less discount

Invoice amount less discount

Invoice Amount

Borrowing costs

Opportunity Cost (Interest lost)

Discount Amount

Net Effect of Discount Amount less Borrowing Costs

Net Effect

Assumes loan is repaid at invoice due date

Assumes withdrawal is redeposited at invoice due date

Effect On Company Profitability of Taking Vendor Discount

Per Project:

Per Year:

Average project size in $$

Total Sales ÷ Total # Projects

Number of projects per year

Cost of Goods Sold (COGS) as percent of Sales

COGS ÷ Total Sales

Value of discount per project

Materials as a percent of COGS

COGS% - Subcontractors% - Direct Labor%

Percent of materials purchases on which discount is offered

Not all suppliers offer discount

Additional Profit Per Year=

Average discount per cent offered

Suppliers usually offer discounts of 1%-5%

Value of discount per project

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