So, how much money do you save if you take a 2% discount for paying your bill in 10 days vs. no discount paying in the normal 30 days? It's pretty significant!
Most contractors don't realize how much of a money conduit they are. A $5MM a year builder will push $400,000 per month through the bank and write checks to suppliers for over $2MM. That's almost $200,000 per month! If we assume that all suppliers would give a 2% discount the savings would be $4,000 per month or $48,000 per year! If only half your suppliers will give this discount, it is still $20,000 per year. What is the rate of return for doing this?
Assume you have to borrow the money to take the discounts. And, to make this illustration easy to understand, let's assume you have to tap your credit line for $200,000 for the entire year and the interest rate you pay is 8%. Your cost is $16,000 in interest. Your discount savings is $48,000. The difference is $32,000. And, that is $2,650/mo. you put in your pocket!
Let assume you don't borrow the money. What is your rate of return on the $200,000 you have invested? $48,000/$200,000 is 24%. The rate is actually higher since our example assumes the money is invested for the entire year. However, it is only used for 20 days per month. 30days/20days = 1.5. 1.5x24% = 36%.
Where can you invest your money and get a 36% rate of return? Nowhere!
