The Real Cost of “Not Discounting” Invoices

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Lumber Briefs
Issue #10211 - February 2017 | Page #58
By Matt Layman
Part Four in the Save Money Series

Back in the good old days, when I was a rookie lumber broker, central zone SYP producers offered wholesalers a 5% discount which gave us incentive to work their wood outside Mississippi and Alabama. I offer that just to be aggravating.

Also, back in the day, mills offered a 2% discount to all customers for paying invoices within the agreed upon payment terms. For truckloads and carloads, 2% 10 days after arrival (ADA) or after date of invoice (ADI) was normal. “Good” customers could negotiate 2% 30 days. Producers not only supplied the wood, they served as an intermediate financier. Paying on time was worth more than 24% annual return on a credit line. Of course, everyone at least attempted to discount.

Any customer who didn’t discount was considered a high credit risk, and ultimately would hurt you. They paid a premium for lumber and still do.

Nowadays, discounting a carload saves you 1% if the invoice is paid 5 days after arrival of the car (when it’s spotted, not unloaded). Truckloads fetch the same 1% if paid within 10 days after date of invoice (the day it ships, not the day it arrives). Not only have the discounts been cut in half and the days to discount been reduced, producers have squeezed an extra day or two off the reduced discountable days.

One might wonder, “Why bother to pay the bill on time? Is it even worth it?”

ABSOLUTELY! Instead of reasoning what the savings are, consider what not discounting actually costs.

If you have $1 million of inventory that turns every 30 days, use your credit line to discount invoices, and pay an annualized credit line interest rate of 4%, after allowing for discount days, you will need to use the credit line 304 days or 83% of the time. The annual interest cost of $1 million for 365 days is $40,000 (x .83)…$33,200. That’s what you pay in interest using the bank’s money to discount invoices.

If you do not discount, and pay in 30 days, you are paying 12% annually for those extra 25 days, or three times as much…that is 300% more…$99,600.

In this example, just the difference in using bank money to discount invoices versus not discounting costs you an additional $66,400 every year.

That’s not all. If you do not discount, you cannot buy directly from the mills. You have no option but to buy from office wholesalers who make a minimum of 2.5% per order. Add another $25,000 to the total…per month...$300,000 per year. OUCH! That’s why they call you five times a day. Not discounting a $1 million inventory that turns every 30 days actually costs you $366,400 per year.

$1 million buys you a 100 truckload inventory. What’s that? You don’t buy that much? No problem. How many truckloads do you buy every month?

Multiply the number of monthly truckloads by $3,644.
That is how much not discounting costs you.

I won’t even scare you with the costs for your lumber out of warehouse from wholesale distributors. Try four times the office wholesale number…$14,000 per monthly truckload annually.

And you wonder why your margins are thin? That’s how the competitor who keeps under bidding you not only stays in business but makes better margins.

If this is you, your survival depends on discounting invoices. Do what it takes. While you are working that out, let me help you reduce that waste by 30% starting immediately. It will be the best investment you make during your entire lumber career…$13.44 per week could save you an average of $125 on every truck truckload you buy. Or, just keep doing what you are doing. The under-cutting competitor across town won’t mind at all.

A veteran lumberman, Matt Layman publishes Layman's Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.org.

Matt Layman

Author: Matt Layman

Matt Layman, Publisher, Layman’s Lumber Guide

You're reading an article from the February 2017 issue.

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