You\'re going into business and need to set credit terms for your customers. Eva

Question

You're going into business and need to set credit terms for your customers. Evaluate the following options and tell us which you feel would be best for your company and why? 4/10, 3/15, 2/20 or net 30. Let's pretend that you're in charge of a multi-billion dollar company's accounts payable function. You have $5,000,000 in a checking account. You are presented with an invoice that is dated 4/20 with terms of 3/15 or net 60. Today is May 2nd. Do you pay this invoice early or wait until its due date? What questions must you have answered prior to being able to make a decision?

Explanation / Answer

1. The best option to set credit terms for our customers is 2/20 or net 30 because on an average the cash cycle is of 20 days and so 2% cash discount is affordable to have smooth cash flow and the due date should be kept at 30 day of invoicing to the customer.

2. If the bank is not giving any interest on fund so kept in checking account and there is no urgent need of funds in near future, then we wouldn't wait for the due date and make payment on May 2nd of the Invoice to have 3% Cash discount on Invoice amount.

The questions which we must answer prior to being able to make a decision whether to pay invoice early or wait for the due date are : (1) Is there any urgent requirement of fund ? (2) What benefits we are getting keeping the funds in bank ? (3) Whether quick non-payment of invoice will interupt the business or production ?

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