What is the difference between a trade discount and a cash discount?

(Last Updated On: May 10, 2021)

Discounts and rebates are offered by sellers of goods and provider of services to incentivize buyers and speed up the cash collections process. Trade practices and cash discounts each have advantages related to generating revenue and enhancing cash flow. Below are the key differences between these techniques and how they impact the bottom line.

Trade Discount Definition

Sellers in business-to-business transactions will offer discounts to clients based on a variety of factors, such as purchasing volume and repeat business. These types of incentives are referred to as trade discounts, and they play a large role in winning clientele. In most cases, the discount is taken from the gross amount, list prices of products, catalog prices of the goods or retail price of the purchase order. The sales price net of the trade discount is the new gross sales amount and accounts receivable. Trade discounts are typically variable and change with the quantity purchased.

Example Of A Trade Discount

Wholesale purchases from a supplier of goods such as plastics used by manufacturers of industrial sight glasses might offer a discount for the purchase of a quantity of goods such as acrylic rods in a tube, in different bulk quantities. For example, with the purchase of 100 to 200 acrylic tubes, there might be a 25-cent discount per unit. This discount could increase with the purchase of large quantity orders of 200 to 500 units, to 30-cents per unit. Trade discounts permeate throughout different industries and are used when resellers sell products as bulk sales and services in business-to-business transactions to those known as a concerned consumer.

Cash Discount Definition

When sellers or suppliers of goods or services want to speed up cash collections as in recovering cash debts, they offer cash discounts or a deduction at the time of purchase. A cash discount or early payment discount is applied to a receivable when a customer pays within a specified time period or specific period of time. These types of sales discounts are used in business-to-business transactions, when a supplier, vendor, or wholesaler wants to increase cash flow through cash payments. When clients take advantage of these discounts, they reduce their cost of goods sold or expenses and improve their balance sheet, which is beneficial for all stakeholders in the transaction.

Example Of A Cash Discount

A seller of marketing analytics and related information may offer a 2 percent discount if customers make prompt payment and pay their invoice price of the goods or the invoiced price within a stipulated time of the due date such as a quick payment of 10 days of receiving their bill. The percentage purchase discount can vary, but the principle is the same. Cash discounts incentivize customers to pay their liabilities quickly resulting in an early clearance of dues, help the seller collect cash faster, and may even prevent the customers from paying additional fees from using a credit card instead. Such discounts of the billed price of products are commonplace throughout the industry.

Trade and cash discounts each have advantages and major differences and can increase sales and cash flow. Knowing when to use these discounts, or when to take advantage of them, can impact bottom-line profit and compel customers to make purchases that result in additional sales.