Managing Accounts Payable
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Managing accounts payable is about paying down what you owe as slowly as you reasonably can — holding onto cash for other uses — while still deciding whether an early-payment discount is worth taking.
What is the cost-of-not-taking-a-discount formula?
This answers a specific question: if you skip the discount and hold onto your cash longer instead, what annualized return are you effectively giving up? A discount that looks small on a single invoice, like 2%, can be enormous once annualized — because you're only holding that cash for a matter of days, not a full year.
Worked example: 2/10, net 30
Terms of "2/10, net 30" mean you can pay within 10 days and get a 2% discount, or pay within 30 days with no discount. Skipping the discount buys you 20 extra days (30 − 10) to hold onto your cash.
This formula conventionally uses a 360-day year, a standard simplification in trade-credit calculations. (A sibling practice question on this site specifies a 365-day year in its own problem — both are correct for their respective problems; just don't mix conventions.)
Assuming a 360-day year, there are 18 periods of 20 days in a year (360 ÷ 20).
Next, find the effective discount rate. If you'd pay $100 and get a 2% discount, you're actually only paying $98 — so the discount is measured against what you actually paid, not the original $100:
Multiply the effective rate by the number of periods:
Skipping the discount is equivalent to giving up a 36.72% annualized return. Unless you have somewhere else to put that cash that earns more than 36.72%, you should take the discount and pay early.
Is there a shortcut?
Yes — a simplified version skips the effective-rate adjustment and just multiplies the periods by the stated discount rate:
For this example that's 18 × 2% = 36%, close to the precise 36.72% but not exact. Use the full formula when precision matters.
A small discount on a short timeline annualizes into a large rate. Whether it's worth taking the discount comes down to one comparison: is 36.72% higher than any other return you could earn on that cash in the meantime? For almost any company, the answer is yes.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.