Be careful with Sales Discounts. Every time they are extended, you have reduced the price being charged for your product and services. The amount given to the customer reduces the cash flowing into the business.
Put another way, every percent you reduce from your price reduces your first level of profitability unless you find a corresponding offset in your direct costs.
A Sales Discount is used to persuade people to buy now. It reduces the price accepted by the customer for a product or service. Sales discounts are typically given in exchange for purchasing today, cash discounts for early payment, or any other price concession that lowers the buyer’s price.
The downside of any Sales Discount is it is a deduction from Gross Sales earned. Its accounting effect is shown in the difference between Gross Sales and Net Sales. It is important to record sales discounts as part of any sales transaction that applies versus just invoicing the accepted price. You record the full price charged and the sales discount to appreciate the amount and to whom the sales discount is being given.
The upside of Sales Discounts is they accelerate cash inflow associated with collecting a Net Sale. The number one benefit is that you get the cash today and don’t have to work your A/R collections process should the customer pay slip past the predetermined payment terms.
Another reason to give a sales discount is if the customer takes on a cost that you have factored into the price that you can pass onto them for doing themselves something you would have to do. For example, delivery costs can be discounted to the customer if they pay and take delivery at your facility. Sales discounts that arise from a customer action reducing your costs to them is win/win.