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Grace Periods and Cash Discounts
A grace period is the number of days a seller allow a buyer's payment to go beyond the discount due date while still allowing the customer to take the cash discount. Many companies offer a short grace period to allow for delays in the receipt of payment. Typically, the grace periods allowed by creditor companies in connection with cash discounts are five days or less. This refers to five calendar days, rather than five business days. After whatever grace period is allowed by the creditor company, unearned cash discounts are charged back.
It is important to charge back unearned discounts and apply a disciplined approach to deciding when to charge these discounts back. Generally, it is not a good idea to leave the decision up to the collector responsible for the account. Why? Because the creditor is not unbiased. He or she knows that unearned cash discounts are difficult to convince customers to repay, and given a choice collectors will often opt to allow/authorize an unearned cash discount that is "just" few days beyond the grace period established for the cash application group by the company's credit manager, or controller or CFO.
Copyright 2010 by Michael C. Dennis