“Discount Lost” refers to the extra amount a company has to pay when it misses the opportunity to take advantage of a discount offered by a supplier for early payment. The term is used in the context of purchase transactions where suppliers offer early payment discounts as an incentive for faster payment.
Let’s consider a simple example. Suppose a supplier gives an invoice of $1,000 to a company, offering a 2% discount if the invoice is paid within 10 days (this is often expressed as “2/10, net 30” which means a 2% discount if paid in 10 days, otherwise the full amount is due in 30 days).
If the company pays within the 10-day window, it pays $980, saving $20. However, if the company pays after the 10-day period, it must pay the full $1,000. That extra $20 it has to pay for missing the discount period is known as “Discount Lost”.
The Discount Lost can be seen as a kind of financial cost. Although it’s not an out-of-pocket expense, it represents a missed opportunity to save money. Depending on the volume of transactions and the terms of the discount, these costs can add up over time, affecting the company’s overall profitability.
Example of Discount Lost
Let’s consider a more detailed example:
XYZ Corporation purchases raw materials from a supplier, ABC Manufacturing. ABC sends an invoice to XYZ for $5,000 and offers terms of 2/10, net 30. This means XYZ can take a 2% discount, or $100 ($5,000 * 2%), if they pay the invoice within 10 days. If they don’t pay within 10 days, they must pay the full invoice amount within 30 days.
Now let’s consider two scenarios:
- XYZ Pays Within the Discount Period: If XYZ pays within 10 days, they pay $4,900 ($5,000 – $100 discount), and there is no discount lost.
- XYZ Pays After the Discount Period: If XYZ pays after 10 days but within 30 days, they must pay the full $5,000. The $100 that they could have saved by paying earlier is the “discount lost.”
This “discount lost” represents an opportunity cost for XYZ Corporation. Even though it’s not a direct out-of-pocket expense, it’s a cost in the sense that XYZ missed out on the chance to reduce its expenditure. If XYZ frequently misses such opportunities, the total discount lost could become a significant amount over time.