Need more CASH?
Anticipation Discounts should be a last resort
When a firm requests a customer to pay early in exchange for an additional discount they are offering an anticipation discount.
As you saw in an earlier blog on cash discounts, anticipation discounts can be a very expensive. If you ask a customer to pay their bill early they will expect a benefit in exchange. Remember a 1% discount in 10 days versus payment in 30 days translates to annual interest rate of 18%. If you ask a customer to pay 30 days early in exchange for a 5% discount your effective annual interest rate is over 60%. (365 days / 30 days * 5% = 60.83%)
In addition to anticipation discounts being extremely expensive financing, they also communicate to the customer that you have cash flow and cash management problems. In your customer’s position, you would probably look to add a back up source for your product or services in case you fail. That backup source will want a piece of your volume and may create disruption in your pricing program.
Anticipation discounts are an indication of cash problems. Firms that resort to anticipation discounts have deeper problems and need to focus on the cause of the cash shortfalls.
There are other alternatives which are also expensive but do not risk your business relationship with key customers. Working with a B2B CFO® will bring you a resource that is familiar with local business bankers and alternative financing options. A B2B CFO® will also help your business focus on its profits and cash flow.
B2B CFO® has over 200 experienced chief financial officers who stand ready to help businesses improve their cash management processes.