Dave M. answered • 10/08/19
Expert-Generalist Tutor with M.Ed; Career Specialist; Business Teacher
Such a fun question! To answer this, you obviously need to know what the "secret code" in the invoice terms is telling you. I'll list them separately:
5/10 means a 5% discount if payment is received within 10 days
4/15 means a 4% discount if payment is received in 15 days (but after 10 days, so days 11-15)
n/60 means no discount, or the "net" (total) amount due within 60 days (but after the 15 days, so days 16-60)
The "most common" terms are often 2/10 n/30, spoken aloud as "two ten net thirty". Using the clues above, what does this mean? (answer below)
This means a 2% discount will be given if you pay your full amount within 10 days of the invoice date, or pay the full non-discounted amount within 30 days (days 11-30). For companies operating on a "do the work first then bill the customers" basis, getting paid by the customers is hugely important. Why? The company has already done the work, which will surely involve some type of expense-- electricity, materials, supplies, payroll, etc., and so the company's own bills will be due or were already incurred, and if they don't get paid by the customers in time, they will be unable to pay their bills. Interestingly, any time a company does the work for which they will be paid, it is booked as revenue. So, a company can have all sorts of revenue booked on paper and still manage to go out of business if they don't have the "cash flow" (money flowing back into the business by collecting from customers) to pay their own expenses.
This is why discounts are offered for quick payment--- the company would rather give up a little bit of their potential sales revenue in order to guarantee they will be able to cash flow positively and pay their bills (or at least use the money for other income-producing activities).
So... back to your question...
Invoice of $1160 is dated July 19 and $253 is partially paid on August 2. What are the break point dates for our potential discounts? 10 days and 15 days, or at minimum, 60 days. July 19 + 10 days = July 29, so we don't qualify for the 5% discount if paid within 10 days. July 19 + 15= August 3 (don't forget July has 31 days). Since we paid on August 2, we could qualify for the 4% discount, but the entire balance would need to be paid by August 3.
4% is the same as 0.04. So, our potential discount is 1160 x 0.04= $46.40. We could take the full amount and subtract this $46.40, but that's two steps. The shortcut is to multiply the original balance by 100% - the discount % or in this case, 100%-4%= 96%. That's because our full balance, reduced by 4%, will be 96% of the original. This makes it much faster to calculate, and more useful, since the discount is less important than the amount I will need to pay: 1160 x 0.96= $1113.60. So, if we pay on days 11-15, we can pay $1113.60 instead of the full $1160, and the company will call it even / paid in full.
Since we paid $253, our balance remaining is $1113.60 - $253 = $860.60. However (!!!), if we don't get this payment to the company by the end of the 15th day (remember the terms were 4/15)-- and that cannot include check is in the mail, they actually need to receive it-- we forgo the 4% ($46.40) discount and are once again responsible for the full $1160, now minus our $253 partial payment, for a balance of $907.
According to the n/60 (net 60) terms, this $907 remaining must be paid within 60 days of invoice, or July 19 + 60 days = .... (I'll let you do the counting!)
Hope this helps!
