Intro
– 1%/10 Net 30 is a trade-credit payment term that gives the buyer a 1% discount if the invoice is paid within 10 days; otherwise the full amount is due in 30 days. It’s used to encourage early payment and accelerate cash inflows.
Key points
– Meaning of numbers: first = discount percent (1%); second = days in discount period (10); third = final due date (30).
– Incentive vs. credit: the discount is an incentive for early payment; if not taken it effectively functions as short-term credit (the implicit cost of foregoing the discount is the “interest” on that credit).
– Effective cost of not taking the discount: forgone discount / (1 − discount) for the discount-period length. For 1%/10 Net 30, the periodic cost = 0.01/0.99 ≈ 1.0101% for 20 days (30–10). Annualized ≈ 18% (≈18.2% using a 360-day year), so declining a 1% discount can be expensive.
– Accounting treatments:
• Gross method: record full receivable; record discount only if payment is made within the discount period.
• Net method: record receivable net of the discount (assumes discount will be taken); record lost discount as interest expense if not taken.
– Common use: offered by vendors (often those with healthy margins) to improve working capital and reduce receivables.
Example
– Invoice: $1,000 — terms 1%/10 Net 30.
• Pay within 10 days: $1,000 × (1 − 0.01) = $990.
• Pay after 10 days but by day 30: $1,000 (no discount).
• If you forego the discount, the implied 20-day cost ≈ 1.0101%; annualized cost ≈ 18%–20% depending on days-per-year convention.
Quick takeaway
– Taking a small early-payment discount is often financially attractive because the implicit annualized cost of not taking it is typically very high.