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Vendors quite often offer customers that have significant sales with them rebates and discounts. Should a customer take advantage of these opportunities and what are the down sides of these offers? A client of mine came to me to ask me to analyze what would be the most beneficial in their circumstance.
The definition of a discount is a deduction from the usual cost. This is typically given for paying earlier then terms. So, for example you will receive an invoice that will say 2/10 Net 30. That means the full amount needs to be paid within 30 days however if you pay within 10 days you can take a 2% discount off the price.
The definition of a rebate is a pay back of money already paid. This is typically given based on quantity of money spent. So, for example if you purchase 1-5 million dollars annually the company will get back 2% of all purchase and from 5-10 million you will get back 5% of all purchases and so on.
There are two primary discussions that need to be made regarding this decision. The first is cash flow, does the business have the capability to pay early? This may not be a uniform decision so may have to be made on a case by case basis depending on time of year and cash balances available.
The second point is more interesting and is a mathematical equation. Every time you take a discount, your sales is reduced by that amount and the amount available for rebates will be lessened. Is it worth it to minimize the discounts and focus on the rebates that will be received at the end of the year or vice-a-versa?
In the case of this client, cash flow was not an issue so taking a discount made sense. This vendor after calculations was more favorable to discounts versus rebate. In conclusion discounts should always be taken by this company with this vendor. Rebate would be less but not as much of a reduction as would be received on the discounts.
In conclusion a discussion with heavy volume vendors should occur to see if they offer discounts and rebates. Even if they do not, it would behoove companies to have that conversation especially if there is ample cash flow to take advantage of discounts. Rebates will be a win-win as they require no change in business and promote sales to specific vendors.
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