Difference Between Trade Discount and Cash Discount

Difference Between Trade Discount and Cash Discount

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Rashmi Karan
Manager - Content
Updated on Jun 28, 2024 15:30 IST

Discounts are integral to commercial trading. Since time immemorial, they have been part of the transactions that buyers offer and sellers implicitly or explicitly receive. Two of these types of vital discounts are trade discounts and cash discounts. The main difference between a trade discount and a cash discount is that a trade discount is a reduction from the list price offered to buyers in bulk, while a cash discount is a reduction from the list price. Learn the difference between trade discount and cash discount, the concepts of trade discount and cash discount, and their advantages.

Difference Between Trade Discount and Cash Discount

Difference Between Trade Discount and Cash Discount

The main difference between trade discounts and cash discounts is that trade discounts are given by the manufacturer or supplier to the intermediaries in the distribution chain (wholesalers and retailers) to encourage sales and bulk purchases, while cash discounts are offered by the seller to the buyer to incentivize prompt payment, resulting in faster cash flow and reduced accounts receivable for the seller.

Trade Discounts Cash Discounts
Trade discounts are generally offered as part of a seller discount policy. The cash discount is offered above the list price.
The seller uses a Trade discount mechanism to ensure that they retain the buyer for this transaction and future transactions, making them a repeat buyer. A prompt payment discount is more about getting paid as quickly as possible.
Quantity-specific transaction. Cost-focused transaction.
Less credit risk as the focus is primarily on higher yields and repeat business for buyers and sellers. Transaction size is smaller; the credit risk is higher.
It is part of a long-term strategy where buyers want to lower their distribution, marketing, sales, and other transactional costs. The seller wants to ensure he receives payments quickly, in advance and whole, rather than in instalments.
Since trade discounts are already included in the product prices shown in the catalogue, they are not recorded in the books. A cash discount is not part of the market price and is offered on top of it and thus is recorded for both sellers and buyers.
The trade discount is product-specific and does not discriminate based on the payment mechanism. Cash discounts are offered to those customers who make the payment, preferably in cash.

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What is a Trade Discount?

A trade discount is an amount a manufacturer or supplier reduces the market price of a product when it is sold to a retailer or reseller. The reseller then charges his clients the market price for a higher profit. Trade discounts typically state a specific amount or percentage reduction, and the value often increases when the reseller buys in bulk.

Retailers usually sell products at the suggested retail price but may increase the discount to remove excess inventory. The discount can also be significant, especially when the manufacturer intends to establish a new distribution channel or if the reseller has excellent distribution power. In these cases, resellers can request an additional discount.

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What are the Advantages of Offering Trade Discounts?

Offering trade discounts could have the following advantages:

Increase sales

Offering a lower price for multiple purchases can increase sales because many customers want to take advantage of those deals. Promotional sales, volume purchases, and coupons attract new customers while encouraging existing ones to buy your products in bulk to maximize value for money.

Reduce company costs

For small businesses, trade discounts can significantly reduce business costs. Typically, small businesses spend most of their capital on production equipment and resources. Therefore, trade discounts from manufacturers or suppliers can save a lot of money that would have been spent on these expenses.

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Increase your purchasing power

When your company searches for vendors and suppliers who offer trade discounts, you can spend more time and money in other business areas. As a result, you may pay less for ordering, inventory, or production equipment costs. So you can use the capital you save to improve production facilities, hire more employees or launch marketing campaigns.

Build Your Reputation

You can create a positive perception of your business using trade discounts, especially when you offer high-quality products at discounted prices. This allows you to build customer trust, and increase customer satisfaction and retention rates. Satisfied customers may even give your positive business reviews and recommend others.

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What is Cash Discount?

A cash discount, a prompt payment discount, a sale discount, or a purchase deal is an incentive that sellers offer to buyers who pay their bills before their due dates. With these rebates, a business reduces the amount of money its customers owe by a certain percentage or a specific amount when the customer pays their bill. 

This discount can help customers pay their bills within the specified timeframe and allow businesses to receive money sooner. Prompt payment discounts only apply to cash payments.

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What are the Advantages of Offering Cash Discounts?

Cash discounts are beneficial to businesses in many different ways, including

Motivating customers to make payments

Suppose your company mostly sends invoices for services or products and accepts payments at a later date. In that case, early payment discounts can incentivize customers to pay their invoices on time or sooner. Offering a cash discount can also show customers that you appreciate their business, which can help you build long-term relationships. Loyal customers are also more likely to make payments on time.

Increase cash flows

Because early payment discounts encourage customers to pay off balances early, your business can have quicker access to more cash. Instead of waiting for the end of a specific payment term to receive funds, you can use this incentive to increase your cash flow and use that money to pay for operating expenses promptly.

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About the Author
Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio