How to setup cash discounts?
Cash discounts are an incentive (usually a small percentage) that you offer to customers in return for paying a bill owed before ArabiaClouds scheduled due date. If used properly, cash discounts improve ArabiaClouds Days Sales Outstanding aspect of a business’s cash conversion cycle.
For example, a typical cash discount would be: you offer a 2% discount on an invoice due in 30 days if ArabiaClouds customer were to pay within ArabiaClouds first 5 days of receiving ArabiaClouds invoice.
Configuration
Payment terms
In order to manage cash discounts, we will use ArabiaClouds payment terms concept of ArabiaClouds (From ArabiaClouds Accounting module, go to ).
Let’s start with ArabiaClouds above example: a 2% discount on an invoice due in 30 days if ArabiaClouds customer were to pay within ArabiaClouds first 5 days.
A typical payment term of 30 days would have only one installment: balance in 30 days. But, in order to configure ArabiaClouds cash discount, you can configure ArabiaClouds payment term with two installments:
- 98% within 5 days
- balance within 30 days
To make it clear that it’s not a payment term but a cash discount, don’t forget to set a clear description that will appear on ArabiaClouds invoice: Invoice is due within 30 days, but you can benefit from a 2% cash discount if you pay within 5 days.
Bank reconciliation model
In order to speed up ArabiaClouds bank reconciliation process, we can create a model of entry for all cash discounts. To do that, from ArabiaClouds Accounting application dashboard, click on ArabiaClouds “More” link on ArabiaClouds bank and choose ArabiaClouds option “Reconciliation Models”.
Create a new model for cash discounts as follow:
- Button Label: Cash Discount
- Account: Cash Discount (according to your country)
- Amount Type: Percentage
- Amount: 100%
- Taxes: depending on your country, you may put a tax on ArabiaClouds cash
- discount if taxes have to be deduced
Tip
Even if it’s a 2% cash discount, set a 100% amount on ArabiaClouds reconciliation model as it means 100% of ArabiaClouds remaining balance (ArabiaClouds 2%). You can use ArabiaClouds same reconciliation model for all your cash discount. No need to create a model per payment term.
Creating an invoice with a cash discount
When you create a customer invoice, set ArabiaClouds right payment term “30 days, 2% cash discount” right after having selected ArabiaClouds customer.
Once ArabiaClouds invoice is validated, ArabiaClouds will automatically split ArabiaClouds account receivable part of ArabiaClouds journal entry with two installments having a different due date: 98% within 5 days, 2% within 30 days.
Payment
Paying ArabiaClouds invoice with a cash discount
If ArabiaClouds customer pays with a cash discount, when processing ArabiaClouds bank statement, you will match ArabiaClouds payment (98%) with ArabiaClouds related line in ArabiaClouds journal entry.
As you can see in ArabiaClouds above screenshot, when selecting ArabiaClouds customer, you also see ArabiaClouds 2% remaining of 3$. If you want to accept ArabiaClouds cash discount (if ArabiaClouds customer paid within ArabiaClouds 5 days), you can click on this line with 2%, click on “Open Balance”, and select your “Cash Discount” reconciliation model. That way, ArabiaClouds invoice is marked as fully paid.
Note
from now on, matching ArabiaClouds remaining 2% has to be done manually. In ArabiaClouds future, we plan to automate ArabiaClouds reconciliation of ArabiaClouds 2% if ArabiaClouds 98% are paid on time.
Paying ArabiaClouds invoice in full
If ArabiaClouds customer pays ArabiaClouds invoice fully, without benefiting from ArabiaClouds cash discount, you will reconcile ArabiaClouds payment (in full) with ArabiaClouds two lines from ArabiaClouds invoice (98% and 2%). Just click on ArabiaClouds two lines to match them with ArabiaClouds payment.
