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Introduction to this document

Discounts for prompt payment calculator

If your company’s suppliers frequently offer a percentage discount for immediate payment, how can you work out whether it’s worth paying the invoices early or keeping the money in your company’s bank account?

Annual interest equivalent

Discounts for prompt payment are one of the arithmetics of finance. They’re typically favourable, as they are designed to encourage early payment, but terms vary considerably. Examples of their coded language include:


Terms (%)

0.5/10, n/60

½% if paid within ten days, net in 60 days

1/15, n/30

1% if paid within 15 days, net in 30 days

2/10, n/eom

2% if paid within ten days, net end of month


Once you have broken the code you’ll need to get a calendar out. For example, if a purchase was made on October 1 with terms of “2/10, n/30”, the discount can be taken if payment is made between October 1 and 10 (or potentially one more day, depending on the agreement). The discount can’t be taken between October 11 and 30. After that, the bill is overdue. Skipping past the discount date will only achieve a 20-day deferral of payment (the 30th instead of the 10th). If you consider that you are “earning” a 2% return by paying 20 days early (10th instead of 30th), it is indeed a large saving. Consider that there are more than 18 (365/20) 20-day periods in a year, and, at 2% per 20-day period, this equates to over a 36% annual interest equivalent (AIE).

Use our Discounts for Prompt Payment Calculator to calculate the AIE on offer from your supplier.

Value for money?

Calculate the AIE of the terms of a discount offer using our calculator to see if it is reasonable compared to other interest rates available to you. While discount percentages may seem slight, they can represent substantial (annual) savings.

If you have surplus cash earning less than the AIE, accept the discount with both hands. If you would incur interest charges by paying early but they are less than the AIE, you should also take the discount. For example, if the company's overdraft interest rate is 9%, then take up any discounts with AIEs above this.

You’ll need to set up an accounting system to process payments on a timely basis and take advantage of all reasonable discounts. For example, this might involve using a simple hanging-file system whereby invoices are filed for payment to match the discount dates. Or your accounting software may allow you to enter invoice discount dates and keep track of/process them automatically.