In the business world thirty days is considered cash. That is to say, if the bills are paid thirty days after shipment of the goods it is considered as being a cash transaction. In some lines sixty days is considered cash, but in the majority of cases, and particularly in the plumbing-supply business, thirty days is the recognized time for the payment of bills. In following out the policy of payment all bills may be paid on certain dates - such, for instance, as the first day of each month - or each individual bill may be paid thirty days from its date.
In order to induce purchasers to pay for their goods before the expiration of thirty days, ready money being necessary for the conducting of a large business, supply houses offer a premium of 2 per cent. to those who will pay their bills within ten days of shipment. That is to say, an additional 2 per cent. is allowed off the net amount due for a bill of goods, and not off the gross cost of the goods before the discount was deducted. To illustrate: If the cost of a shipment of soil pipe, according to the list price, amounted to $800, and it is subject to a discount of 60 per cent., the net amount due the supply house at the expiration of thirty days would be $800x.40 = $320. Now, if instead of waiting thirty days before paying the $320 the contractor wishes to take advantage of the 2 per cent. cash offer, at the expiration of his ten days he would send his check for $320 less 2 per cent., or $320 x .98 = $313.60. By this simple method he saves $6.40 by paying one bill twenty days sooner than it is due. This in itself might seem a small sum to be interested in, but in business it is the small items that should be looked after, for it is not likely that a large item of expense will be overlooked, and when the saving effected by discounting bills is looked at in the proper light it is not a small item by any means. For the use of money for twenty days the supply houses pay as much interest as most savings banks pay for the use of money for a whole year. Think it over. At the rate of 2 per cent. for twenty days it amounts to over 36 per cent. per annum - a nice reward for promptly paying one's debts. Look at it in another way. Suppose the purchases of a contractor amounts to $20,000 per annum and he takes advantage of the 2 per cent. discount on all his bills. In that case he will have saved $400 simply by discounting.
It will thus be seen that considerable money can be saved by discounting one's bills. But there is a further profit, which has not yet been mentioned. The business of a contractor who pays his bills promptly is worth more to a supply house than the business of those who are notoriously slow pay, and just as in the contractor's business he will do work cheaper for a reliable concern which pays promptly than he will for a concern which is a slow pay, so will the supply houses give better terms to their prompt customers than to their slow ones. It pays, therefore, in more ways than one to have the reputation of discounting bills, and whenever a contractor has sufficient working capital to warrant such a course it is earnestly recommended. Unless, however, the contractor has sufficient working capital to take advantage of the benefits of discounting without crippling his business he had better not do so. There are times in business when time is of more consideration than the extra 2 per cent., and if the contractor is carrying considerable work with a large payroll it might be advisable to allow the 2 per cent. discount to go by default and keep his ready money for the current expenses, pending payments on his several contracts. The contractor, himself, is the only one who can determine which course to pursue, and all that is necessary here is to point out to him the advantages and profits accruing from the practice of discounting bills.