2/10 net 30
2/10 Net 30 Example
Mary has started a processing plant for natural vegan snacks. In her business, equipment does all of the heavy lifting that human resources can not. Mary has purchased many pieces of equipment. One of these is a large oven to bake her healthy snacks in. She has been offered 2/10 net 30 payment terms.
She purchased this oven 7 days ago and is already selling her treats at a very fast pace. Mary already has the cash to pay her invoice in full. She wants to evaluate the benefits of 2/10 net 30 terms of payment.
The invoice amount is $10,000 and 2/10 net 30 accounting is in place.
If paid within 10 days: $10,000 X 98% = $9,800 due with in 10 days
If paid within 30 days: $10,000 is due
Mary likes that she can receive a $200 value by paying her bill quickly. Then, she finds a catalog which offers a tool that will speed the preparation time of her products by employees. Knowing her business quite well, she estimates that preparation time of one full box of her snacks will be cut by 2 hours. This leaves 5 hours of preparation time remaining.
Mary also knows that 6 employees usually work on one full box of treats. These employees receive $10/hr in wages. This means that she can save $120 on just one box of her products. The calculation is done below:
Normal preparation time: 7 hours of work X $10/hr X 6 employees = $420 to prepare one box
Preparation time with the tool in question: 5 hours of work X $10/hr X 6 employees = $300 to prepare one box
Mary is selling boxes at an extremely fast rate. If this continues, which Mary expects, she will quickly save more money by buying the new tool than paying the bill on the oven within 10 days. She appreciates the 2% discount but decides against it. Mary buys the tool and quickly makes more money than she would have saved with the credit terms of 2/10 net thirty.
For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.
[box]Strategic CFO Lab Member Extra
Access your Cash Flow Tune-Up Tool Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to learn more about SCFO Labs[/box]