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2/10 Net 30 Example

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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.

Details

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

Calculation

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.

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2/10 net 30 example

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2/10 net 30 example

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2/10 net 30

See Also:
2/10 Net 30 Example
Credit Sales
Letter of Credit
Line of Credit (Bank Line)
Net 30 Credit Terms
5 C’s of Credit (5 C’s of Banking)

2/10 net 30 Definition

2/10 net 30, defined as the trade credit in which clients can opt to either receive a 2 percent discount for payment to a vendor within 10 days or pay the full amount (net) of their accounts payable in 30 days, is extremely common in business to business sales. Anywhere a vendor offers credit terms it is likely that they also offer some discount to motivate early payment.

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2/10 net 30 Meaning

2/10 net 30 means a discount for payment within 10 days. The purpose of this is to shorten accounts receivable cycles for those who provide credit terms. This is essential when vendors have accounts receivable turnover cycles which exist longer than preferred. A business that offers a 2/10 net 30 discount is expressing that it is more important to have cash as quickly as possible than it is to have the full amount of their payable. The fact that lack of cash is one of the main reasons businesses fail makes these terms commonplace. Businesses love to offer 2/10 net 30 for 2 reasons: it makes customers happy while speeding up cash cycles.

Variations on this method include 2/10 net 40, 2/10 net 45, 2/10 net 60, 2/10 n 30 EOM (end of month), and more. These terms may also be referred to in a variety of terms: 2/10 n 45, 2/10 n 60, 2/10 days net 30, 2 percent 10 net 30 days.

The 2/10 net 30 discount makes no statement on the payment of bills beyond 30 days. Vendors may or may not have a late payment penalty for such customers. It is up to the discretion of the purchaser to decide the best method of closing accounts payable when 2/10 n 30 is available.

2/10 n 30 journal entries vary depending on the accounting method used. LIFO vs FIFO, accounting vs economic income, and many other matters make 2/10 n 30 accounting somewhat complicated. Strong company policies must be in place to ensure smooth bookkeeping.

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2/10 net 30 Formula

There is no single 2/10 net 30 formula. Despite this, 2/10 net 30 interest rate equations can often fall into this model:

If paid within 10 days:
Invoice Amount X 98% = 2/10 net 30 effective interest rate

If paid within 30 days:
Pay the invoice in full

2/10 net 30 Calculation

2/10 net 30 calculations are quite simple once understood fully.

The invoice amount is $10,000 and 2/10 net 30 accounting is in place.

If paid within 10 days, then:
$10,000 X 98% = $9,800 due with in 10 days

If paid within 30 days, then:
$10,000 is due

By using the 2/10 net 30 principle, you can greatly improve your cash flow capabilities. Download the 25 Ways To Improve Cash Flow to find other ways to improve your cash flow within 24 hours.

2/10 net 30

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

2/10 net 30

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