On the 2nd Wednesday of each month I answer the most interesting question I receive from readers.
Isn’t offering a discount for better payment terms the same as buying cash flow?
No, and I never recommend discounting to buy cash flow. In fact, of the 5 benefits I listed that justify offering a discount in exchange for non-refundable payment upfront, none of those involve buying cash flow or maximizing “time value of money”.
Full payment upfront dramatically reduces churn, gives customers more options for how they work with you, and simplifies business relationships, among other benefits. These benefits justify offering a discount in situations where it makes sense.
When does it not make sense? Examples:
Long duration engagements / commitments- pre-paying a 5 year contract actually puts both parties at risk.
Super short engagements – by default you should either require full payment in advance for these anyways or just accept normal payment terms.
Tough margins- if for some reason your bid is priced at rock bottom margins, even full payment upfront wouldn’t justify a loss making situation.