Supplier credit or a cash discount: which wins?

Compare two numbers. What the discount saves you, against what that same cash earns while it stays in your shop. If your stock turns over faster than the credit period runs, take the account. If your money sits still or your margin is thin, take the discount and pay today.

What each side is actually offering

These look like two ways of buying the same goods. They are not. They are two completely different arrangements, and they hand you two different things.

Credit hands you time. Your goods arrive, your shelf fills, your drawer stays as full as it was, and the bill lands later. For a shop with limited working money that is enormously valuable, because the same rupees now do two jobs instead of one.

The discount hands you a lower cost. Every item on that delivery costs you less, so every sale of it earns you more, and there is no date circled on anybody's calendar. What it takes from you is the cash, on the day, all of it.

The mistake most shopkeepers make is treating this as a matter of temperament. Careful people take the discount, ambitious people take the credit, and both quote a saying to justify it. It is not a matter of character at all. It is arithmetic about your own shop, and the two shops on either side of you may honestly get opposite answers.

The number, on one delivery

Take an ordinary delivery and put both offers through it.

Say one delivery of Rs 100,000, thirty days on account

Bill if you take the accountRs 100,000

Bill if you pay on the spotRs 97,000

What the thirty days cost youRs 3,000

What Rs 97,000 earns in your shop in a monthRs 5,800 at 6%

Better choice for this shop, this monthTake the account

The row that decides it is the last one. Rs 3,000 is what the thirty days cost you, and Rs 5,800 is what the money earns if you keep it working instead. On those figures the account wins comfortably, and paying cash to save Rs 3,000 would be the expensive choice.

Now change one thing. Suppose your goods take sixty days to sell rather than thirty. The money does not turn over inside the credit period at all, the bill arrives before the stock has earned it, and you end up paying from somewhere else. The same offer that was excellent has become a trap, and nothing about the supplier changed.

Change another. Suppose your margin is 3% rather than 6%, which is normal on some lines. Now the money earns roughly what the discount saves, and the two are level, so the tie-breaker becomes which one leaves your shop safer, and that is almost always the discount.

This is why copying the shopkeeper across the road is a bad method. He has different goods, a different turnover and a different amount of his own money already tied up in his khata.

The two offers side by side

Beyond the arithmetic there are real differences in what each arrangement does to your shop.

The two offers, side by side

Goods on accountCash, at a discount

What it does to your drawerGoods on accountLeaves your cash free to workCash, at a discountEmpties it the day goods arrive

What it does to your costGoods on accountYou pay the full rateCash, at a discountEvery item costs you less

If sales are slow that monthGoods on accountThe bill arrives anyway, with pressureCash, at a discountNothing is owed, nothing is chasing you

Your standing with the supplierGoods on accountBuilds a record he trusts, if you pay on timeCash, at a discountMakes you his easiest customer

The real riskGoods on accountBuying more than you can sellCash, at a discountNo cash left for a bad week

Look carefully at the third row, because it is the one that catches people. The account does not care whether you had a good month. Rain, illness, a closed road, a customer who did not pay you, none of it changes the date on the bill, and the pressure arrives at exactly the moment you are least able to handle it.

The cash purchase has no such date. If your sales are poor, you simply buy less on the next delivery and nothing is chasing you, which is worth a great deal to a shop with no reserve behind it.

Then look at the fourth row, because it points in the other direction. A shopkeeper who settles his account on the day, every time, becomes the customer a supplier protects when stock is short and rates are moving. That standing is real and it compounds, and it is one of the honest arguments for using credit even when the arithmetic is close.

When the cash discount clearly wins

There are situations where you should not think about it for long.

When your margin is thin. On low-margin goods the discount is often larger than anything your money could earn in a month, and taking a few percent off the buying rate is the single biggest improvement available to you on that line.

When the stock moves slowly. Anything that takes longer to sell than the credit period is being financed by you either way, so you may as well own it more cheaply, and it is the same reasoning that applies to stock that never quite sells.

When your khata is already heavy. If a large part of your money is sitting in customer balances, you are already extending credit down one side of your business. Taking more of it from the supplier stacks two delays on top of each other, and one slow month can unwind both at once.

And when you know yourself. Some shopkeepers buy more when there is nothing to pay on the day, and that is a normal human response rather than a fault. If an account tends to leave you with a fuller shelf than your sales justify, the discount is protecting you from something the arithmetic cannot see.

When credit is worth more than the discount

The opposite case is just as real, and shopkeepers who avoid all credit on principle usually leave money behind.

When your goods turn over faster than the account runs. Twenty-day stock on a thirty-day account genuinely pays for itself before the bill is due, and this is the strongest single reason to use supplier credit.

When you are short of working money and the shelf is thin. An empty shelf costs you sales every day, and credit is the fastest way to fill it without borrowing from anybody. Just size the delivery against what you can sell rather than what you can fit, which is the discipline in buying stock in bulk or a little at a time.

When you want a real relationship with the supplier. An account paid promptly, month after month, builds a history that shows up as better allocation when goods are scarce and quiet warnings before a rate moves. That is worth more than one delivery's discount, and it is part of why dealing with one supplier or several is a decision worth taking seriously.

The costs that hide on both sides

Both arrangements have quiet costs, and they are the reason a decision that looked right on paper sometimes disappoints.

On the credit side, watch the rate itself. Some suppliers quote a higher rate to account customers without ever mentioning it, so the credit is being paid for inside the price and the discount you were offered was simply the real rate all along. Compare the two bills line by line, not offer against feeling.

Watch the buying discipline too. Goods that cost nothing today are easier to over-order, and a delivery bought on that feeling turns into shelf-filler you paid full price for.

On the cash side, the cost is what the empty drawer prevents. If paying today means you cannot buy a fast-moving line next week, or cannot handle a broken freezer, the discount cost you more than it saved. Cash discounts should come out of money you can spare, never out of your working float.

And on both sides, the real cost is not knowing your own numbers. If you cannot say what your stock actually earns you, none of this can be decided honestly, which is what working out your shop's real profit gives you.

Deciding it for your own shop

Four checks, done once, will settle this for most of what you buy.

Four checks that answer it for your own shop

1. 1How many days that stock takes to sellIf a delivery clears in twenty days and the account runs thirty, the goods pay for themselves before the bill is due, and credit is close to free money for you.
2. 2What one rupee actually earns in your shopYour margin times how many times the money turns over. A shop turning stock twice a month at a small margin earns more from cash in hand than any discount is worth.
3. 3Whether you can actually pay on the due dateAn account you settle late costs you the rate, the discount and the relationship. Take credit only for a bill you can already see the money for.
4. 4How much of your own money is stuck in your khataA shop with heavy customer credit outstanding is already lending; adding supplier credit on top stacks two delays on each other and one bad month unwinds both.

The first two together give you your answer for a whole category of goods, not just one delivery, and that is what makes them worth the effort. Fast-moving, decent-margin lines usually favour the account; slow, thin lines usually favour paying cash.

The third check is the one to be ruthless about. A supplier account you settle late is the worst of both worlds: you pay the full rate, you lose the discount you could have had, and you damage the relationship that made the credit valuable. If you cannot see the money for the bill on the day you order, the honest answer is a smaller delivery, and the discipline of paying an account properly is covered in buying stock on credit.

Keep the answers written down rather than in your head, per supplier and per kind of goods. If your stock and your accounts are in an app, this becomes something you can actually see: Wasoolo holds a buy rate against each product and keeps what you owe each supplier separate from what your customers owe you, so the two sides of your shop stop blurring into one number.

There is no permanent answer here. Rates move, your turnover changes, and a shop with more of its own money behind it makes different choices than the same shop did a year earlier. Redo the arithmetic when something changes, and take whichever side is winning today.

Common questions

My supplier offers both. Can I take the discount on some deliveries and the account on others?

Yes, and it is usually the smartest arrangement available to you. Split it by the goods rather than by the week: pay cash for your slow, thin-margin lines where the discount is worth most, and take the account on the fast movers where your money earns more elsewhere. Suppliers rarely object, because they get certainty on part of what they send you and a reliable account customer on the rest.

What if the discount is only one or two percent?

Then it is probably worth less than keeping the cash, on any shop that turns its stock over reasonably. A small discount only wins where the money would otherwise sit still, which happens on slow lines or in quiet stretches. The exception is a shop with no reserve at all, where the value of not owing anybody money on a bad week can be worth more than the arithmetic suggests.

Is taking supplier credit risky for a small shop?

It is not risky in itself, and it is one of the most useful tools a small shop has. It becomes risky in three specific ways: when the delivery is larger than you can sell in the credit period, when the bill lands in the same week as other payments you had not lined up, and when it becomes so normal that you no longer know what you actually owe. Each of those is a planning problem, not a reason to refuse credit.

My supplier keeps his rate the same but offers longer credit. Is that a good deal?

It can be, but check the rate against another supplier before you accept it, because longer credit is sometimes priced quietly into the goods. If the rate is genuinely the same, longer terms are a real gain and worth taking. Just remember that a longer account tempts you to order more, and the size of the delivery matters more to your safety than the number of days on it.

Should I ask for a cash discount if the supplier has not offered one?

Ask, plainly and without drama, because many suppliers will give something to a customer who pays on the spot and simply never advertise it. Put it as a straightforward question about what he can do on the rate for immediate payment, and be ready to hear no. Even a small reduction on a line you buy every fortnight adds up over a year, and asking costs you nothing beyond a moment.

How do I know how fast my stock actually turns over?

Pick one line and watch one delivery: note the date the goods arrive and the date the last piece sells. That single measurement, on your three or four biggest lines, tells you more than any general rule and takes no extra work beyond writing down two dates. Once you know that a carton lasts eighteen days, the whole credit question answers itself for that product.