5 Easy Ways To Get Vendor Discounts

As an organization, you have plenty of options to boost your cash flow. But did you know that taking advantage of vendor discounts is one of the simplest ways to do it? Shockingly, many companies miss out on these opportunities year after year, leaving money on the table.

In this blog, we’ll discuss what a vendor discount is, how it can help your bottom line, and how Accounts Payable automation can help you make the most of your vendor discount opportunities.

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What is a vendor discount?

A vendor discount is a special offer provided by a supplier to incentivize prompt or even early payment for goods or services. Essentially, it's a discount for paying your bills early or on time.

According to a survey by the Institute of Finance and Management (IOFM) in 2021, 65% of vendors offer early payment discounts to their customers, and the average discount is around 2%. What could that mean to you and your organization?

Let’s look at an example:

Imagine that you get an invoice for $10,000 with payment terms of 2/10, net 30. This means that the vendor is offering you a 2% discount if you pay their invoice within 10 days. Otherwise, the full amount is due within 30 days.

If you pay the invoice within the discount period, you would save $200 and would only pay $9,800. If you pay on day 30, you would pay the full amount.

Now imagine that every vendor you work with, on a monthly basis, offers you a discount. Imagine how much money you could save during your fiscal year!

How can I get a discount from my vendor?

In many circumstances, vendors give discounts to organizations they work with on a regular basis. Not only does it incentivize early invoice payment, it also helps to create a stronger relationship with their customers, showing a commitment to customer satisfaction, which in turn can encourage a customer to choose that vendor repeatedly for products or services, instead of switching to a competitor.

Here are five ways to encourage your vendors to give you a discount:

Pay your bills early: Most vendors offer an early payment discount. Some vendors might also have incentives for quick cash payments.
Increase the volume you purchase: Volume vendor discounts give buyers access to a lower purchase price, and these savings can often be passed down the line. Try to evaluate your forecasts for inventory purchases for a full quarter (or longer) instead of monthly.
Extend your contract: Customer loyalty is often rewarded. Vendors and suppliers might offer rebates, price lock guarantees, or special offers if you are loyal to them when it comes to your purchasing habits.
Check your membership benefits: Is your organization a member of a club or association? Check to see if you qualify for any offers like preferential pricing that might be members-only.
Collaborate on process improvements: Work together with your suppliers to streamline operations, reduce waste, or increase efficiency. Demonstrating a willingness to invest in a mutually beneficial partnership may result in suppliers being more inclined to offer you discounts as a reward for your efforts in optimizing the supply chain.

How do I account for discounts?

When you get an invoice that offers an early payment discount, there are two ways to record it in your accounting system: the net method and the gross method.

For example: you get an invoice for $5,000 with a 3% discount, if you pay within 10 days.

Net method: If you pay within the discount period, record the net purchase amount of $4,850 ($5,000 - $150 discount) as a debit to purchases and a credit to accounts payable. If you miss the deadline, you would need to pay the full $5,000 - so you would debit accounts payable for $4,850, credit cash for $4,850, and debit lost purchase discounts for $150.

Gross method: Record the gross purchase amount of $5,000 as a debit to purchases and a credit to accounts payable. If you pay the invoice within the discount period, you would debit accounts payable for $5,000, credit cash for $4,850, and credit purchase discounts for $150.

This sounds easy - why are so many companies missing out?

Unfortunately, many companies aren’t taking advantage of these savings and are literally leaving money on the table. One of the main reasons: they don’t have AP automation. They lack the visibility, automation, and resources to process invoices on time and take advantage of discounts.

Here are some key problem areas for companies that don’t use AP automation:

Limited visibility and control: Without AP automation, businesses have limited visibility into the payment status of each invoice, making it harder to identify those that are eligible for early payment discounts.
Slow payment processing and data entry errors: Without AP automation, manual invoice processing is a slow process. Invoices move through multiple hands for manual approval, data entry, and payment. Manual data entry mistakes and mismatched purchase orders can result in delays that make it difficult to take advantage of early payment discounts.
Poor cash flow management: Without AP automation, organizations lack real-time visibility into payment status and cash flow projections. This can lead businesses to struggle to manage their cash flow effectively, making it hard to take advantage of early payment discounts.

How does AP automation help?

Your optimized path to vendor discounts is AP automation. This will empower you and your accounting teams to be ready when your vendors offer you discounts for early invoice payment and help you have all the resources you need in place to take full advantage.

Here’s how an automated accounts payable solution can help:

Improved visibility and control: AP automation software streamlines the invoice approval process and provides better visibility into the payment status of each expense. With greater control and visibility, you can easily identify invoices that are eligible for early payment discounts and take full advantage of any discounts.
Faster payment processing: AP automation software speeds up payment processing by automating tasks like data entry, routing, and approval. This allows you to pay invoices faster and take advantage of early payment discounts before they expire.
Reduced errors and disputes: AP automation software automatically matches invoices to purchase orders and receiving reports, reducing the likelihood of errors. This means that invoices will be paid accurately and on time, and in time to take full advantage of vendor discounts.
Improved cash flow management: AP automation software can help you better manage your cash flow. With real-time visibility into payment status and cash flow projections, you’ll reduce the amount of time that funds are tied up in accounts payable and be fully prepared to take advantage of early payment discounts.

Are you ready to automate?

Using a full procure-to-pay AP automation solution like Quadient Accounts Payable Automation by Beanworks can help you take full advantage of early pay discounts.