How to Calculate the Implied Cost of Not Taking Advantage of a Discount

Most suppliers offer discounts if the full balance on a purchase is paid in full before a specific time period. But what if you don’t take advantage of the discount? Ever wondered what the implied annual cost of not taking the discount is?

You can use this formula to easily figure out the implied annual cost of not taking advantage of the discount and to better organize your payables to maximize your dollar returns.

If you’re firm can’t afford to take advantage of every supplier offered discount, at the very least you can use this method to easily identify offers with higher discounts to realize higher savings.

[ (1 + ( Discount % / (1 – Discount %) ) )^(365/days past discount) ] – 1

Let’s see how this works in a real life example.

A supplier usually quotes a discount in this format: 2/10 net 30

This simply means the supplier offers a 2% discount if the full balance is paid within 10 days, and the full balance is due within 30 days, or without a discount after the 10-day discount period.

Plugging in the numbers from the example, this is the computed annual implied cost of not taking advantage of the discount:

[ (+1 ( .02 / (.98) ) )^(365/20) ] – 1 = .44585 = 44.59%

As you can see, it could be very costly for businesses not to take advantage of supplier offered discounts.


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Peggy holds a Bachelor Arts degree with honors in Economics from York University in Toronto, Canada. She is a Certified Management Accountant (CMA). She has also passed Level I of the Chartered Financial Analyst (CFA) Program. She is also a realtor. Write to peggy@business2press.com
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  • Ashwiin_14

    Hi

    Kindly explain the rationale behind the formula. Thanks

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