# Calculate cash discount: example and tips

Calculate cash discount: cash discount is a discount given to customers only if they meet a short-term payment deadline. Who pays briskly, who saves. If the customer takes more time with the transfer, he has to pay the full invoice amount.

Self-employed people encounter cash discounts in two places in a business context: on incoming invoices from suppliers or when a customer asks to receive a discount. You are offered a cash discount or you allow the possibility of a cash discount yourself. But first it is important to know: How much money are we talking about here?? Is the cash discount worth it?

## Calculate cash discount: How does it work?

Frequently with cash discount 2 or 3 percent of the invoice amount. But this difference in the amount to be paid can be noticeable.

The formula for the discount calculation is:
Invoice amount * discount rate = discount amount.

Calculating the payment amount afterwards is simple:
Invoice amount – cash discount amount = payment amount.

Example: You have a painting company repaint all the offices of your company. At the end there are 10.000 Euro net on the bill. Plus 19% sales tax comes to a payable amount of 11.900 Euro together. The painting company offers you a 2% discount if you transfer the invoice within 7 days.

10.000 Euro minus 2% gives 9.800 euros. Plus 19% sales tax, the amount to be paid is now 11.662 euros. That is 238 Euro less than the original invoice amount. The calculation can be abbreviated, because the result looks the same if you deduct the 2% from the gross amount 11.deduct 900 Euro. Even then 11 remain.662 Euro to be paid.

You can offset the sales tax from this business expense via input tax deduction. So you actually saved 200 euros (the difference between 10.000 and 9.800 Euro).

Let’s turn this around: You are the master painter and together with your employees you have painted the office rooms. This has taken a few working days. Your whole team worked only for this one customer in the time and the invoice amount is important for the liquidity of your company. After all, you have to pay wages soon and also other liabilities are pending.

You grant the customer a 2% discount as an incentive for him to transfer the money quickly. You make 200 euros less turnover, but have the money quickly – for example within 7 days – on the account. You can pay all your debts without overdrawing the company account. You do not pay interest to the bank and you sleep better. This can easily outweigh the 200 euros less turnover. Particularly since you have the possibility of granting discount surely already with the offer with eingepreist.

## When is cash discount useful and for whom?

It is not always useful to use or give discounts. Also 2 or 3 percent can be relatively much money, if over the year many such deduction amounts accumulate, which are not credited to you as a service provider. And as an invoice recipient, you may be in a liquidity bottleneck and now have the choice: pay the invoice quickly, deduct the discount, but the company account into the red, or wait and pay the invoice in full?

Offering or demanding cash discount during negotiations is advantageous if:

• You as the invoice recipient can pay your invoice immediately: You save money.
• You can use cash discount as a negotiating argument: If a client asks you for a discount, you can offer a cash discount. This way you get an advantage for yourself, namely that of faster payment.
• you can consolidate a lasting customer relationship by offering a discount.
• You work in an industry where cash discount is common. It is not everywhere.
• You can curb the risk of long payment delays: The money is in your account after 7, 10 or 14 days, not only after 6 weeks and after you have written the first reminder.
• You have calculated your fee rates and prices in such a way that you have enough leeway to allow cash discount: Calculating discounts hurts you if it causes your fee to be pushed toward or below your pain threshold.

This means: If you have calculated well, you can have discounts calculated. Those who are liquid and can pay bills immediately, it also benefits.

Calculate cash discount automatically with Billomat!

With our Accounting software Billomat you can Cash discount calculate save. For invoices, simply set your desired percentage and Billomat will calculate the discount amount for you. To save time and manual work next time, you can also use templates or create new templates for invoices yourself.

## Who grants cash discount?

In some industries, it’s relatively common or even customary to offer cash discounts. For example, many tradesmen rely on cash discounts to encourage customers to pay quickly. In other industries, however, cash discount is the absolute exception and absolutely requires prior arrangements. If a customer does not adhere to this and deducts a discount on his own authority, this can cause some trouble, confusion and additional work in accounting.

Calculate cash discount: The real saving takes place in the net amount, because entrepreneurs pass the sales tax to the tax office anyway. (Image © unsplash.com)

## Cash discount in accounting: How do I book it??

For the master painter, cash discount is a reduction in profit: he takes in less money. In addition, the incoming payment and the invoice amount do not match now. In order for the accounting to be complete and coherent, cash discounts must be noted and booked correctly. This is also the case on the customer side: Here cash discount reduces the operating expenses, but also at the customer now the invoice no longer matches the amount transferred.

First, it is important that the invoice states that cash discount is offered. Only in such a way both sides can prove later, how it comes to the deviation in the payment amount. With a subsequent price reduction, as represented by the cash discount, the original booking is partially cancelled. The consequence of this is that all amounts to be booked or posted are reduced, including sales tax.

For the master painter who painted the offices, this means that in order to balance the debit and credit sides, the difference, i.e. the cash discount amount, has to be posted to an offsetting account. It’s the same for the customer: he, too, needs an accounting account in which he can post cash discounts in order to make the invoice with the cash discount smooth and traceable in the end.

## Deduct cash discount from gross or net?

The invoicing party indicates on the invoice whether the recipient can deduct a cash discount or not. For the discount he gives the invoice recipient his conditions. The basic conditions for the cash discount deduction are with the Discount amount or rate as well as with the payment deadline precisely specified on the basis of two criteria. The invoice recipient may deduct a discount only if the invoice allows him to do so.

### Deducting the cash discount

If the invoice specifies a fixed cash discount amount, this is of the gross amount to be deducted from the invoice. The remaining amount from the difference results in the reduced invoice amount.

### Deduction at cash discount rate

Invoices that specify a cash discount rate as a percentage, the recipient can freely choose whether to base the invoice on the net amount or the gross amount.

• Net Deduction:
If the discount amount is determined from the net amount of the invoice, it is deducted from the net amount of the invoice. VAT must be added to the remaining amount in net to get the reduced invoice amount in gross.
• Gross Deduction:
If, on the other hand, the gross amount serves as the basis for the cash discount deduction, the calculated cash discount amount is deducted to obtain the reduced invoice amount without any further invoice steps.

## Calculate discount: How high should the discount be?

Neither the German Commercial Code nor the German Civil Code contains any legal provisions on cash discounts. Apart from the invoice recipient’s entitlement to a cash discount in the invoice document, the law does not have any specifications on cash discounts. In addition to the granting of discounts, the freedom of design also applies to the amount of the discount rate and the conditions on the use of discounts. Usually suppliers and service providers grant their customers a Discount rate of up to 3 percent.

## When is there a legal right to a discount?

If a supplier or service provider has offered a cash discount in its offer or if a cash discount has been contractually agreed in another form as a condition for placing an order, the invoice recipient’s claim to a cash discount is legally valid.

## How to show cash discount in the invoice?

§ Section 14 of the German Turnover Tax Act (UStG) states in paragraph 4 that the indication of an agreed reduction of the remuneration is one of the legally required information on invoices. If a discount has been agreed, the invoicing party must indicate on the invoice the amount of the discount and the conditions under which it can be deducted. It is up to the invoicing party, either a discount amount or a discount rate in percent to indicate. The wording is also up to the invoicing party. Many billers use a phrase such as: "2% discount for payment received by date" or "3% discount for payment within 7 days".

With Billomat you calculate not only Cash discount automated, but can also Invoices, offers, reminders and much more in record time.