Offering discounts is a great way to incentivize purchases, increase your revenues, and keep your customers coming back. If your business decides to offer discounts, you’ll need to make sure that they’re correctly applied to your invoices.
This article explains what cash discounts and trade discounts are, and how you can apply them to your invoices.
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What is a trade discount?
A trade discount is a percentage or dollar amount taken off of the item price or the invoice total. For example, the standard price of a product is $20, and the discounted price is $15, or a 10% discount is taken off of the invoice total due to a summer sale.
Trade discounts come in many forms, for instance:
Quantity discounts: Quantity discounts, also known as volume discounts, are offered when a customer places a large order. For example, if a customer places an order for 500 items, you may offer a 10% discount.
Seasonal discounts: Seasonal or special discounts can be offered throughout the year. They’re limited-time discounts to convince customers to make a purchase.
Referral discounts: You can offer a customer a discount if they refer a family member or friend to your business.
What is a cash discount?
Cash discounts are an incentive for customers to pay their invoice early. Unlike trade discounts which offer a reduction in a product or service’s price, cash discounts offer a small percentage discount on the total invoice price if they pay the balance within a certain time frame.
For example, you can apply a 5% discount on the invoice total if the balance is paid within 7 days of the invoice issue date. Therefore, if the invoice is for $100, the customer could pay $95 within 7 days, or $100 between day 7 and the stated invoice due date.
How to apply a trade discount to an invoice
Any discount you apply to a sale needs to be clearly stated on the invoice. Trade discounts can be stated as either a single-line discount or an overall discount. A single-line discount is a reduction in the price of a single item on the invoice, whereas an overall discount is a reduction of the invoice total.
Invoicing software can help you to create discounted invoices quickly and correctly. With SumUp Invoices, you can enter an overall percentage discount from our premade invoice template.
Below is an example of a discounted invoice created with SumUp Invoices.
How to apply a cash discount to an invoice
Cash discounts are stated in the following format: 5/7, net 30. In this example, the customer would receive a 5% cash discount if the invoice is paid within 7 days. Otherwise, the customer would need to pay the full balance within 30 days.
Cash discounts should be clearly stated in the “Terms & Conditions” section on your invoice. If the customer pays the discounted price within the stated time frame, the cash discount should be recorded as an expense.
Discounts and sales tax
If your business is registered for tax, you’ll need to issue tax invoices to your customers. Discounts are fairly straightforward when it comes to sales tax: discounts can only be applied to the subtotal, and then the tax is added to the discounted price.
For example, let’s say you are selling an item that is normally $100 but now discounted for $50. Your sales tax rate is 10%. The sales tax would only be applied to the discounted price (i.e. $50), and therefore, the invoice total would be $55.
The benefits of offering discounts
Although discounts reduce the amount your business gets paid, there are several benefits to offering discounts to your customers.
Discounts can attract new customers and also help you to retain existing customers. If a potential customer is indecisive, a discount might persuade them to choose your business over your competitors.
In addition, discounts can help you to sell old stock to make way for newer products. For instance, offering a summer discount can help you move out your winter stock and convert your inventory into cash.
How much of a discount should I offer?
This can be tricky for new business owners to figure out. You need to find a balance between being competitive and being profitable.
Ultimately, it is up to each individual business to determine how much discount to apply and in what form. It would be beneficial to look at your competitors' pricing to see what others are offering in your field. You can then take a look at your profit margin and identify how much you’re willing to offer as a discount.
If your business decides to provide discounts, it’s recommended to include these in your budget for the next month or quarter. Factoring in discounts gives you a better overview of your business’s profits.
Software to create discount invoices
SumUp Invoices is invoicing software that helps you create professional invoices quickly. You can add an overall discount to your invoices in just a few clicks.
You can also set up automatic payment links so your customers can pay instantly online - no more waiting for checks in the mail.
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