Cash Discount
Introduction
A cash discount in dealer financing is a reduction in the invoice amount offered to the dealer by the corporate entity if the dealer pays the invoice within a specified period. This incentive is designed to encourage early payment, thus improving the cash flow for the corporate entity.
The discount is usually expressed as a percentage of the total invoice amount and is contingent upon the dealer making the payment within a predefined timeframe. If the dealer pays within this period, they can deduct the discount from the total amount due.
Example
Let's consider a practical scenario to understand how cash discounts work in dealer financing:
Scenario
Invoice Amount: ₹10,000
Cash Discount: 2%
Discount Period: 10 days
Explanation
Invoice Issuance - The corporate entity issues an invoice to the dealer for ₹10,000.
Cash Discount Offer - The corporate entity offers a 2% cash discount if the dealer pays within 10 days.
Calculation of Cash Discount
Cash Discount Amount = Invoice Amount × Cash Discount Percentage
Cash Discount Amount = ₹10,000 × 2% = ₹200
Payment within Discount Period
If the dealer pays the invoice within 10 days, they can deduct the cash discount from the total invoice amount.
Amount to be Paid = Invoice Amount - Cash Discount Amount
Amount to be Paid = ₹10,000 - ₹200 = ₹9,800
Summary
In summary, a cash discount in dealer financing is a strategic tool used by corporate entities to incentivize early payments from dealers. It offers a mutually beneficial arrangement where corporates receive quicker payments and dealers enjoy cost savings.
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