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Hi,
For past questions, when calculating the cost of an early settlement, we calculate the old receivables, new receivables and calculate the difference between old finance cost and new finance cost (including the reduced revenue as a cost of discount)
I remember learning the formula
(1+(x/100-x))^(12/n) where n is the number of months we are receiving money earlier – does this give the percentage cost of discount and could/should this be used in the above calculation?Thank you,
If it a simple discount (such as currently receivables take 2 months to pay and they will get a discount if they pay in 1 month) then we use the formula you quote.
If it is a more complicated situation (such as some taking 2 months to pay and some taking 3 months to pay) then the formula is not relevant and we do it the way you describe in your first paragraph.
I explain both situations in my free lectures on the management of receivables and payables.
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