What is a Payables Discount?

A payables discount is a discount granted by a supplier when you pay its invoice early. Suppliers offer this discount in order to accelerate the flow of cash from their customers. This discount is especially common when a supplier is short on cash, and has few other funding sources. The effective interest rate on most early payment discount offers from suppliers is so advantageous that you should always accept such deals and pay early.

How to Process Payables Discounts

It is all too easy to lose track of payables discount offers and simply pay when the invoices are normally due for payment, thereby losing the early payment discounts. The best processing options are as follows:

Examine at receipt. One way to ensure that all early payment discounts are accepted and paid in a timely manner is to examine every invoice at the point of initial receipt, and set to one side all invoices containing discount offers. This group of invoices containing discounts can then be shifted to a different process flow that emphasizes faster data entry, approval, and payment processing. Where possible, approvals are made using the negative approval system, where payments will be made unless an authorized person protests an invoice. If a positive approval is needed for these invoices, either manually walk them through the approval process or install an automated workflow management system that automatically routes them to a backup approver if an invoice is not approved by a specified date.
Set a system flag. Another option is to set a flag in the customer file whenever a customer is offering early payment discounts on an ongoing basis. The intent here is to completely automate the process, so the customer will have been pre-approved for payment. In this case, the payables software sees the flag and processes the standard discount percentage that is also stored in the customer file.

In short, special handling may be appropriate when it is imperative to accept early payment discounts that have extremely favorable effective interest rates.