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Hi,
why do we compare a 30/60 or 90 day saving on overdraft/finance against an annual discount cost? Wouldn’t the cost of discount have to be apportioned by the same 30/60 or 90 days to make it a fair comparison of cost? thanks in advance.
For eg:
Current receivable: 9M*60/365 = 1,479,452
new receivable: (9M*0.3*30/365)+(9M*0.7*60/365) = 1,257,534Decreased receivable = 221,918
saving on OD (8%) = 17,753
Cost of discount (9M*0.3*0.01) = 27,000
To me this is the annual discount, however we are considering OD charge savings on receivables of 60/365 days. Isn’t this a mismatch for cost comparison?
When comparing the savings on overdraft/finance against the annual discount cost, it is important to consider the time period over which the comparison is being made. The cost of the discount is typically calculated on an annual basis, while the savings on overdraft/finance are often calculated based on the reduced receivables period (e.g., 30/60/90 days).
The reason for this is that the cost of the discount is an annual expense that the company incurs for offering the discount to customers. On the other hand, the savings on overdraft/finance are based on the reduced amount of receivables during the specific period (e.g., 30/60/90 days) due to the early payment resulting from the discount.
By comparing the savings on overdraft/finance against the annual discount cost, companies can assess whether the benefits of offering the discount outweigh the costs. While the time periods may not be directly comparable, this approach allows for a comprehensive evaluation of the financial impact of the discount policy.
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