If you’re an accounting or finance professional, there’s a good chance you’ve heard the term “cash discount vs. surcharge program” mentioned in passing at some point.
What does this mean?
How do these programs help businesses manage their cash and track their expenses?
Do you need to implement one at your company?
If you’ve read any business blog or accountant’s column over the past few years, you know that cash is a limited resource for almost every company. It doesn’t matter how big your firm is or how much profit it brings. You can always use more cash. To that end, many companies implement cash discount vs. surcharge programs to manage their expenses and stretch their cash as far as possible.
The Basics of a Cash Discount Program
A discount program is a sales discount that businesses offer to encourage customers to buy their product or service in a given timeframe. It works by providing the customer a discount based on the time before the sale is completed. This common accounting practice helps a company make the most of its available cash. A discount program is essentially a way to ensure you get paid sooner rather than later. You offer a discount on the item’s price to anyone who pays promptly. This way, instead of waiting 30, 60, or 90 days for payment, you get the money in just a few days.
The Benefits of Offering a Discount Program
Several key reasons why a discount program works so well for companies. First, it gives you a clear idea of when you’ll be paid. If a customer is taking their time to pay, it can be challenging to know when the money will hit your account. A discount program lets you know when the funds will be due at the start of the transaction. This prevents you from getting caught off guard in the future and running short on cash. Another significant benefit is that it encourages prompt payment. This can be especially helpful if you do a lot of business with people unfamiliar with your payment terms. When you offer a discount program, it gives customers an extra reason to pay you quickly.
The Basics of a Surcharge Program
A surcharge program is a type of sales surcharge that a retailer adds to the price of a product or service to get the most value out of their available cash. It works by adding a surcharge to the cost of a given product or service, thereby making it more expensive. That additional cost is then applied to the purchase to help the retailer manage its cash flow and stay in business for as long as possible. A surcharge program is essentially a way to ensure you don’t run out of cash too quickly. By adding a surcharge to the cost of a product or service, you can take that money and use it to pay down your debt. This way, you get the money you need and can continue to operate your business.
The Benefits of Offering a Surcharge Program
Several benefits are associated with a surcharge program, including:
1. Improved cash flow
Improved cash flow is probably the most significant benefit of a surcharge program. This strategy allows retailers to charge more for products and services while maintaining a profit margin. By increasing the price of products and services, retailers improve the amount of cash they have on hand. This money can pay down debt and manage a business’s cash flow.
2. Increased trust
Customers often hesitate to do business with retailers with poor reputations for paying their bills on time. A surcharge program can help retailers improve their reputation by showing they’re willing to sacrifice profits to get paid sooner. This can be a great way to show your customers that you’re committed to paying your bills on time.
A Quick Guide to Cash Management Strategies
There are several ways that businesses can use cash discounts and surcharge programs to manage their cash. You can combine them to create a cash management strategy that works best for your company. Here are a few examples:
The cash discount + surcharge strategy– This is one option many businesses use. With this strategy, retailers offer a cash discount to customers who pay their bills quickly. They also add a surcharge to products and services sold on terms. This helps retailers earn more money up front while still getting their money reasonably.
The reverse cash discount + surcharge strategy– Retailers can use a reverse cash discount + surcharge strategy. This strategy offers retailers a surcharge on products and services sold on terms. They also add a cash discount to products and services that are paid quickly. This strategy gives retailers more money upfront and encourages customers to pay quickly.
How do Cash Discount and Surcharge Programs Work Together?
You can use these programs together or on your own. It depends on your business and what you need to do to manage your cash effectively. You can also add a surcharge to products and services if you offer a discount program. This helps you take advantage of the cash you earn upfront and encourages your customers to pay quickly. If you provide a surcharge program, you can also add a cash discount to products and services that are paid quickly. This helps you get more money upfront and encourages your customers to pay on time.
When Should You Use a Discount Program?
There are a few situations that call for the implementation of a discount program. First, if you have a slow-paying customer, it’s normal to wait a few days or weeks to get paid at your company. It can become a problem if you have a customer who always pays late. A discount program can help you get paid sooner and put the money to work if you have a large purchase. You might be worried about waiting for the money to hit your account if you have to buy a large piece of equipment or a sizable inventory. A discount program can help you get the cash sooner and put it to work.
When Should You Use a Surcharge Program?
A few situations call for the implementation of a surcharge program. First, if you have a high-paying customer, it’s normal for your best customers to get a discount on the products and services that they buy from you. But if those discounts are significant, you risk losing money. A surcharge program can help you get the most out of your high-end customers if you have a high-value sale. If you’re trying to sell a large piece of equipment or a significant service contract, you might be worried that it won’t bring in enough money. A surcharge program can help you get the most value out of each sale and make sure you get paid quickly.
Cash discount vs. surcharge programs are essential to any business’s cash management strategy. They help companies to track their cash flow, increase their overall cash flow, and manage expenses. Sometimes, a cash discount program and a cash surcharge program are necessary. These programs work best when they are targeted to suitable customers. Finally, it’s important to note that these programs will only work if you enforce them. If your customers know you’re not serious about prompt payment, a cash discount vs. surcharge program won’t do you any good.