Home
Back
Effective Cash Discount Rate Formula:
| From: | To: |
Effective Cash Discount Rate represents the actual rate of return or cost of financing associated with the advantage of a cash discount offered by a supplier for early payment of an invoice.
The calculator uses the Effective Cash Discount Rate formula:
Where:
Explanation: This formula calculates the effective annualized rate of return from taking advantage of a cash discount for early payment.
Details: Calculating the effective cash discount rate helps businesses evaluate whether it's financially beneficial to take advantage of early payment discounts or use alternative financing options.
Tips: Enter the cash discount rate as a percentage, term for payment in days, and cash discount period in days. Ensure the discount period is less than the payment term.
Q1: What is a typical cash discount rate?
A: Typical cash discount rates range from 1% to 3%, often expressed as "2/10, net 30" meaning 2% discount if paid within 10 days, otherwise net due in 30 days.
Q2: Why is 360 days used instead of 365?
A: The financial industry often uses 360 days as a standard banking year for interest calculations to simplify computations.
Q3: When should a business take advantage of cash discounts?
A: When the effective cash discount rate is higher than the company's cost of capital or alternative investment returns.
Q4: Are there limitations to this calculation?
A: This calculation assumes simple interest and doesn't account for compounding effects or other financial factors that might influence the decision.
Q5: How does this relate to accounts payable management?
A: Effective cash discount rate analysis is a key component of accounts payable optimization and working capital management strategies.