Credit Matters Blog

Settlement Discount - The Canary in the Coal Mine

Kim Radok 06 July 2012


In times gone by, coal miners would take canaries with them in to the coal mine. Canaries are extremely sensitive and did not survive when harmful cases gases built up to an unsafe level in the mine. Coal miners could not always detect when these gases reach the level which could kill them.

The canaries were therefore their safety mechanism and warned them before the gases reached a dangerous level for the miners.

In today's fragile business environment, settlement discount can be a strategic cashflow incentive which encourages your customers to pay early and within terms. 

When customers do not take advantage of a settlement discount incentive, or no longer pay early for the discount, maybe they are suggesting they have cashflow issues. In these circumstances, settlement discount becomes your "payment canary" highlighting the possible liquidity problems of your customer.

What are the disadvantages and advantages of using settlement discount?

The Disadvantages

The main disadvantages with settlement discount are:

(i) keeping customers honest if they claim the discount outside of payment terms;

(ii) recovering the cost of settlement discount claimed incorrectly;

(iii) handling the complaints of your salespeople who claim the additional cost of the discount, makes your products and services more expensive.

These complaints are valid to a point, but are not insurmountable for a dynamic business which understands the importance of cashflow and of keeping their customers off the stop-supply list.

The Advantages

1  The refusal of a customer to accept settlement discount when it is available in this day and age, must be viewed suspiciously.

There may be nothing wrong in their refusal. However the suspicious risk manager in me wants to ask "Why is it not in their strategic plans to take advantage of  every great financial opportunity to save money?"

2  The cash paid by the customer and in your bank account, means the 'sale' has been completed.

I believe every dollar in your Debtor's Ledger which is not an authorised special sale, and is not paid within terms, indicates YOUR CASH is in your customer's bank account rather than yours.

As the age old adage says "A sale is not a sale until the money is in your bank account!"

3  When a customer, which has been taking up your settlement discount offer, stops taking the discount, trouble is usually not far away.

When the discount is no longer taken up, it is usually the first sign the customer is in cashflow trouble, and this your "Canary in the Coal Mine" warning.

4  Settlement discount usually encourages your customers' CFO or accountant to try and pay you first. Those other suppliers which do not offer the discount will normally be paid if and when the money is available.

In my view, in today's fragile business environment, your business must take EVERY opportunity to encourage your customer to pay as quickly as possible. Settlement discount is one of those strategies which can put you first in the payment list. In addition, as discussed, settlement discount also acts as your "Payment Canary" to quickly warn of a customer's liquidity issues.

May you be today rather than tomorrow

Kim Radok