Sometimes referred to as a discount period, a net period is the interval between the date when a customer may apply a discount to the balance of an invoice and the date that invoice becomes due. Businesses sometimes use this type of incentive to encourage clients to remit payment in a shorter period of time, which in turn increases the amount of cash flow for that billing period. Customers also benefit from this arrangement, since the discount makes it possible to secure the products they desire for a discounted cost.
There are several different ways to arrange a net period strategy. One of the more common is to offer a percentage discount off the total of the invoice, if the payment is received by a specific date prior to the due date. For example, the typical invoice is issued with a due date that is thirty calendar days after the issue date. If the customer remits payment and it is posted to the account before twenty days have passed from the invoice date, he or she is allowed to take ten percent off the charges reflected on the invoice. This saves the customer money, while also allowing the vendor to make use of those collected funds sooner rather than later.
Another approach to structuring a net period program is to apply a discount to the customer’s account if the most recent invoice is paid off within a specified period of time prior to the due date. With this method, the customer remits the full face value of the invoice. Assuming it is received and posted by the specified date, the vendor applies the discount to the customer’s invoice for the next billing cycle. The amount of that discount is reflected as a line item on the next invoice the customer receives, usually with an description that allows the customer to confirm that the discount was applied properly. The terms of the net period are repeated, allowing the customer the chance to earn another discount and further increase his or her savings.
Receiving payment for the invoice earlier can often help improve the rate of cash flow for the vendor. Since the returns from sales are received sooner, the funds received during the net period can be applied to the vendor’s debt obligations, and possibly allow the business to avoid paying late penalties or even to take advantage of discount programs offered by their suppliers. When this is the case, the vendor not only strengthens the connection with his or her customers, but also generates enough benefits on the back end to offset the cost of any discount extended to customers in return for the early payment.