What is a skonto and why (not) include it in contracts?
Skonto is an accounting term used to express the discount that a supplier (e.g. vendor, contractor, etc.) will give to a customer when the customer pays an invoice within a certain period of time specified by the supplier. Skonto is thus negotiated for cases where the customer pays an invoice before the due date of the invoice, with the determination of when the discount will be due being at the discretion of the supplier.
Skonto can be used as a certain motivational tool to improve the payment morale of customers and to pay invoices faster. In most cases, a Skonto is granted if an invoice is paid within a few days, whereas the standard due date is usually set at weeks or even months (especially in business-to-business contracts). Skonto may then be granted either as a fixed amount or as a percentage of the total invoiced amount.
If the supplier provides a discount, it is up to the customer to decide whether to pay the invoice as soon as possible (before the due date) to take advantage of the discount offered, or to pay after the skonto period has expired, or (in the worst case) to pay late.
What are the advantages of a skonto?
- Improved cash flow - through its incentive element, skonto can enable invoice payments to be received more quickly and thereby reduce the amount of receivables;
- reducing the risk of non-payment - if the customer uses skonto and pays invoices on time, the risk of non-payment or default is logically reduced;
- possible improvement of the relationship with the customer by providing incentives for cooperation.
What are the possible disadvantages of a skonto?
- Profit reduction - through the discount given, the supplier's profit may be reduced, especially if the discount is set too high;
- Increased administrative burden for administration and control - it can be administratively challenging to monitor whether invoice payments are due so that the rebate is granted;
- the need to track where skonto has been given in order to keep proper accounting records.
Overall, therefore, it can be summarised that skonto is a useful tool that can help to boost customer payment morale, improve cash flow and reduce the cost of receivables and collections it is always important to weigh up the potential advantages and disadvantages depending on the supplier's particular situation and relationship with customers.