right this lesson will be a short one
but that doesn’t mean it isn’t important a great way to encourage customers to
pay their invoices as soon as possible and free up our capital is to offer a
discount on the total amount they owe us if they pay sooner let’s say company X
issues an invoice for $100,000 due in 60 days but its finance manager is
interested in decreasing the total amount of trade receivables the company
has on its balance sheet and offers a 2% discount of the total amount due if the
client pays in 30 days that’s a great technique some companies use to
incentivize the early collection of receivables this can be helpful
especially when the company runs out of cash and struggles to cope with a
growing working capital okay there are two ways to account for the discount
from an accounting perspective if we know the client will pay earlier
beforehand we can issue an invoice that contains a discount otherwise the client
will pay our initial invoice and our company will issue a credit note a
document that indicates we owe them money company X will either pay the
credit note with cash or we’ll compensate it against some of its future
receivables with this client okay so that’s one way we can incentivize
clients to pay us earlier and decrease our receivables later in the course
especially in the sections in which we’ll focus on working capital
optimizations we’ll cover several additional
techniques that allow companies to reduce their receivables figures
starting from our next lesson we will talk about inventories this will do for
now thanks for watching