What is the purpose of a sales discount?

The purpose of a sales discount is to encourage prompt payment from customers. By offering a reduction in price for early payment, businesses can improve their cash flow and reduce the risk of default from customers who may delay payment. This strategy promotes a quicker turnaround on receivables, which is beneficial for maintaining liquidity in a business.

When customers are given an incentive to pay earlier, it often leads to a faster collection cycle, allowing the company to reinvest that cash into operations or cover other expenses promptly. This practice is common in credit terms, such as “2/10, net 30,” where customers receive a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days.

The other options do not align with the primary function of a sales discount: increasing inventory costs, serving as a profit margin, or facilitating product returns do not directly relate to the purpose of incentivizing timely payments from customers.