Tag: Financial Concepts

Earlier this year, I wrote a post about the dangers in giving discounts to your customers. This post has recently been getting lots of traffic - both via search engines and a freelancer forum - that I thought I should discuss some situations where giving discounts is okay.

In my experience, you should generally avoid giving discounts unless you are getting something of value in exchange.

But what merits giving a discount? That depends on your business, your industry, and your personal preferences. One of the best reasons for giving a discount is in exchange for a quicker payment. This is what 2/10 n30 invoices are based off of: Your invoice is due in 30 days, but should you pay us in ten days, we will give you a 2% discount. In this example, having the cash available to you within 10 days is worth the same or more as the 2% cost you are essentially paying.

Another example? If you are in a Software as a Service business for example (or any other business that offers a service on a monthly basis), you want to balance monthly recurring revenue (MRR) with your pre-payments. So you offer a x% discount to your customers who prepay the year upfront. You get cash upfront, and they get a discount (incentive) for doing so.

By offering discounts in exchange for something of value, you are not devaluing your own products and services because you are asking for something in exchange. This is different from the type of discount many small business owners offer where they give the customer a discount just because he/she asked.

Everyday businesses make purchases that don't require special approval. Notepads, printer paper, and paperclips. While the cost of these items are minimal, the problem is how it affects the returns of your business. Read on to learn how a box of paperclips is making your business have to work harder to keep its returns up.

Running a small business means you are handling multiple responsibilities. The product or service you sell is only one part of the equation – there is an accounting and finance component to running a business that can differentiate a successful business from a struggling business.

Accrual vs. Cash basis

There are two ways you (or your accountant) can choose to handle your accounting. First is cash basis. When you receive cash, or pay out cash, that influences your books and affects your tax liability. Accrual is very different. With accrual, you can have income on your books before you have actually been paid. This means you would be responsible for paying taxes on money that you may not have even received yet. On the flipside, expenses can be incurred before you actually pay them out – meaning you can reduce your tax liability before paying out.

Many small businesses would be better off choosing a cash basis. If you're just starting out, you don't want to pay taxes on money you have yet to receive – cash is especially important to you at this stage. However, accrual gives a much better picture of what's going on with your company (imagine if shareholders found out about billion-dollar Boeing contracts only when Boeing received cash for them). Your accountant can help you pick the best method.