WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Discount Profits Everyone is, or should be aware of “discounts.” Few within the drilling industry, however, have given much thought to either how much can be saved by taking advantage of discounts offered by suppliers or the cost of offering discounts. Prompt payments from customers can mean improved cash flow for any drilling operation, less need for borrowed working capital, and far fewer collection problems. Today, when cash discounts are offered by anyone selling services, supplies, or equipment, it is with the expectation the customer will pay within the discount period. In effect, the seller is offering to make the sale for the invoice price reduced by the amount of the discount. The supplier’s invoice usually includes credit terms listing the period of time for which credit is extended, the size of the discount offered to those paying cash, and the date the credit period begins. A cash discount is a reduction in the purchase price for those paying within a specific period. A typical supplier’s credit terms may be stated as “2/10 net 30.” A buyer reads the terms as “a 2% discount if the invoice is paid within 10 days. Otherwise, the balance is due in 30 days. Why should anyone pay quickly to take advantage of a mere 2% discount? Assume a business has been extended credit terms of 2/10 net 30 on a $1000 janitorial supplies purchase. By deciding to take the discount, the company will pay $980 ($1000 less 2%). By ignoring the discount, the full cost of $1000 will be paid within the month. The decision to not take the discount means the buyer is paying $20 to keep the money for an extra 20 days. Because there are slightly more than 18, 20-day periods in a year, the interest cost on an annual basis amounts to more than 36%. Ob- viously, this level of potential savings makes it a smart move to take the discount, even if money must be borrowed to do so. Since the principal disadvantage of offering discounts is the impact on the drilling operation’s profits, the cost of discounts must be weighed against the improved cash flow which can result. Obviously, the credit terms of a drilling business should be designed to improve cash flow, the movement of money in and out of the drilling business. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com )0&"%1 "6)&4 ,, ,, 2)&0 -%3120*"+ )0&"%1 "-% 312., )0&"%1 "-3'"$230&0 .' -&02*" !&+%&% 0*++ */& 3"+ !"++ 0*++ */& !*0&+*-& 0*++ .% "1*-( .,/.1*2& !*0&+*-& 0*++ .%1 .-*$ 0*++ */& "1*-( *21 &0$311*.- "1*-( *21 0*++ .++"01 *1)*-( ..+1 3#1 2"02&0 .%1 "-% 2"#*+*7&01 0*++ */& -$ )*0% 2 8 !*-12&% ).-& 8 8 "5 2., %0*++/*/&*-$ $., 8 444 %0*++/*/&*-$ $., 50 FEBRUARY 2016 WorldWide Drilling Resource ®