From time to time, you might receive a notification from a vendor indicating that they are offering a “discount” on product(s). The offer is usually for:
- A specific product or product line
- Is a limited time offer
- Has a minimum volume purchase requirement
- Might have extended payment terms
Let’s say that the discount offered is for 15% off the normal purchase price. You might conclude that if you do not pass this discount on to your customers that you will reduce your COG (Cost of Goods) by 15% and increase your GPM (Gross Profit Margin) for this product line item. Or, you might decide to pass on part or all of the discount to your customers via some sort of promotion, hoping that it will attract more customers to your business, thereby possibly increasing your sales volume for a specific period of time.
In either case, there are some significant issues which need to be addressed prior to purchasing at a discount as stated in this example.
At Tom Vignali CPA, Inc., we assist our clients with assessing and analyzing purchasing issues such as these. Some of the issues we look at are listed below.
Assessing Minimum Volume Purchase Requirements
If the offer requires you to purchase a minimum volume in order to receive the discount, you must determine how this volume relates to your current sales volume of this product, especially in relationship to the payment terms being offered.
If the minimum volume purchase requirement exceeds your current monthly sales volume for this product, and if the payment terms are not extended beyond what they are normally, unless you are able to sell all of what you purchase (from this deal) in one month, you will be increasing your inventory levels for this product and will be required to pay for more product than you usually sell in one month’s period of time, resulting in “tapping” your available cash.
It is possible that the increased profit margin realized by not passing the discount on to your customer will be adequate enough to cover the increased cash disbursement required to pay for the purchase, but you will need to calculate this out. This calculation is even more critical if you do pass on part or all of the discount to your customer.
Watch Out For This Red Flag!
If the purchase volume significantly exceeds your current monthly sales volume for this product, ie: it requires you to purchase 6 months supply of this product, you will need to seriously review where the funds will come from to pay for this purchase and if you are able to maintain this level of inventory (financially and physically). Available cash flow, inventory, product shelf-life and product viability are also issues which merit consideration.
What Extended Payment Terms Buy You
If the payment terms are extended, say from Net 30 to Net 45, then you can modify the above mentioned sales and payment calculations to 1 ½ months sales volume.
Remember, any purchase beyond your normal monthly sales volume will require additional cash to pay for the purchase, and it will impact your inventory levels accordingly.
Things to Consider Beyond Price
- Terms of the Discount Offer
- Is it a close-out sale of discontinued products
- Can you fund the purchase
- Will it increase your inventory levels after 1 month
- Can you use it as a promotion to increase sales of this and/or other products
Just because the “Price Is Right”, there are many things to consider before making the final decision.
After you review these things to consider, you will be able to make a more informed decision on whether or not this discount offer is a “Deal” or a “No Deal”.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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