Is a supplier discount for ordering more stock worth the cash?

Your supplier offers a deal. Order 400 units at once and get 5 percent off, instead of two separate orders of 200. It sounds like free money. Whether it is depends on how long the extra cash sits idle.

The saving on paper

Say each unit costs Rs 100.

• Two orders of 200 at full price cost 400 times Rs 100, which is Rs 40,000.
• One order of 400 at 5 percent off costs 400 times Rs 95, which is Rs 38,000.

You save Rs 2,000. That is the number the supplier wants you to see.

The cost behind it

Now look at cash. If you ordered 200 now and 200 later, you would pay Rs 19,000 today for the first batch at the discounted rate, no wait. At the full price you would pay Rs 20,000 and another Rs 20,000 months later. With the big order you pay Rs 38,000 today, and Rs 19,000 of that is for stock you will not need for a good while.

So the real question is what that Rs 19,000 would have done if you had kept it. It could pay for ads, fund a second product, or sit as a cushion for slow weeks. Locked in stock, it does none of this.

Put a price on the locked cash

Suppose, for illustration, that you treat cash as costing you 2 percent a month. Maybe it is the interest on a loan, or the profit you would make by using it elsewhere. Your figure may differ.

Two percent of Rs 19,000 is Rs 380 a month.

The saving of Rs 2,000 divided by Rs 380 a month is about 5.3 months. If the second half of the stock will sell within five months, the discount wins. If it takes eight months, you have lost, because the cost of holding the stock has eaten the saving, and that is before counting any storage, damage or the risk that the product goes out of fashion.

Questions to ask before you say yes

• How fast does this product sell? A steady seller can justify a bigger order than something seasonal.
• Can the stock go bad or fade? Food, cosmetics with expiry dates and trend items carry real risk.
• Do I have the space, and can I keep it dry and safe?
• Will I still want this product in six months, or will I want to change the range?
• Is the discount 5 percent because the supplier needs cash now? You may be able to ask for the same price on two orders placed a few weeks apart.

A middle path

You do not have to choose between all or nothing. Try 300 units, or ask the supplier to hold the discounted price for a second delivery in 60 days. Many are open to it with a customer they trust. Just ask politely, and keep any agreement in writing on WhatsApp.

Link it back to your cash

Your pile of stock is also part of your working capital, covered in what working capital is and how to calculate it. The longer it sits, the more it costs you, as shown in the monthly cost of keeping stock on the shelf. And if a product has been slow, read the case for a smaller catalogue before placing any large order.

A discount is a good deal only when the stock sells within the time the saving can pay for. Do the division before you sign.