Cashback
Simply Explained
Simply Explained
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Cashback is a financial incentive granted by vendors to their customers to encourage early payment of an invoice. It is a discount on the invoice amount that is granted if payment is made within a specified period that is shorter than the usual payment term. Cashback serves to improve the seller's liquidity by collecting money more quickly, and it also reduces the credit risk. This discount is expressed as a percentage of the invoice amount and is deducted directly from the invoice total.
Cashback is usually deducted from the gross amount of the invoice, i.e. including VAT. This means that the discount is applied to the total amount payable by the customer. The discount amount thus reduces both the net value of the goods and the VAT due on them. This approach is standard in many countries, especially in Germany, as it simplifies the calculation and accounting and makes it transparent how much VAT is ultimately to be applied to the amount actually paid.
The discount rate and the length of the discount period can vary, depending on the industry, business practices and individual agreements between trading partners. However, there are some general guidelines that are frequently encountered in practice:
These conditions are flexible and are often determined based on the specific needs and strategies of the companies involved. The aim is always to improve the seller's liquidity and at the same time offer the buyer a financial incentive to pay quickly.
There are different types of Cashback used in the business world, depending on the agreement between the trading partners and the purpose of the Cashback. These different types of Cashback allow businesses to manage their cash flows efficiently, strengthen customer relationships and incentivize quick payments. The following table provides an overview of the common types of Cashback, their application in different business contexts and the strategic objectives that can be pursued with them.
| Type of Cashback | Description |
|---|---|
| Supplier Cashback | A discount offered by the supplier for prompt payment of the invoice, usually within specified periods. |
| Customer Cashback | A discount offered by a customer to its supplier for prompt payment in order to reduce costs. |
| Cash Cashback | A discount for immediate or very fast cash payment on delivery or shortly thereafter. |
| Seasonal Cashback | Cashbacks offered on a seasonal basis to encourage sales at certain times or to clear stock. |
| Staggered Cashback | Cashbacks where the discount rate varies depending on when payment is made within the specified periods. |
Cashback offers numerous advantages for both sellers and buyers. Here are some of the most important:
Overall, Cashback creates a win-win situation for both parties by providing financial incentives for prompt payments that contribute to overall financial health and stability.
Important terms relating
to Cashback
| Term | Definition |
|---|---|
| Cashback | A price reduction granted for the prompt payment of an invoice within a certain period. |
| Payment term | The period during which payment of an invoice can be made without financial penalty. |
| Discount period | The specific period within which the customer must pay in order to receive the discount. |
| Cashback rate | The percentage of the invoice amount that is granted as a Cashback. |
| Invoice amount | The total amount shown on the invoice before Cashback is deducted. |
| Cashback amount | The amount deducted as a Cashback, calculated as a percentage of the invoice amount. |
| Net payment | The amount that is actually paid after deduction of the Cashback. |
| Payment terms | The conditions under which payments are accepted, including the discount period and the discount rate. |
This table provides an overview of the key terms that are relevant in connection with Cashback and explains their meanings.
To calculate Cashback, you can use the following formula:
Where:
For example, if you have an invoice for 1000 euros and the discount rate is 2%, the discount amount is calculated as follows:
Accordingly, the amount to be paid after deduction of the Cashback would be 980 euros.
When calculating Cashback, there are some important aspects that you should consider ensuring that the process runs correctly and efficiently:
By taking these points into account, you can ensure that the cash discount calculation is carried out correctly and that your financial accounting remains accurate.
Cashback can be agreed for a variety of services and products, depending on the terms and conditions between the trading partners.
The following diagram shows the services and products for which Cashback is frequently posted and deducted.
The broad applicability of Cashback makes it a valuable tool for companies in a wide range of industries to control their cash flow and manage payment terms effectively. Here is a more detailed explanation of the services and products for which Cashback is booked.
Cashback is often applied in trade agreements for physical products such as industrial materials, consumer goods, electronics, vehicles and many others.
Businesses may also offer Cashback for services such as consulting, maintenance, repair services, construction work and IT support to encourage quick payments.
Cashback can be offered in both the wholesale and retail sectors to speed up stock turnover and improve liquidity.
In the manufacturing sector, Cashback can be used to speed up payment for the delivery of raw materials, semi-finished products or finished goods.
Cashback is also common in agriculture and food processing, especially to ensure fast processing in seasonal markets.
Cashback can be used for the delivery of software solutions or technological products, especially when extensive licenses or maintenance contracts are involved.
Freelancers such as designers, architects or lawyers can also offer Cashback to ensure prompt payment for their projects or consultancy services.
Cashback, Bonus and Discount are all price reductions, but differ in their application and purpose. This table helps to understand the different forms of discounts and the context in which they are typically applied.
| Term | Definition | Purpose | Time of granting |
|---|---|---|---|
| Cashback | A discount on the invoice amount for prompt payment. | Accelerates the receipt of payments, improves liquidity. | Granted for payment within a certain period after invoicing. |
| Discount | A discount on the list price of a product or service. | Promotes sales, responds to competition, rewards customer loyalty. | Mostly granted on purchase and shown on the invoice. |
| Bonus | A compensation or benefit as a reward for achieving goals or long-term loyalty. | Reward for achieving specific goals or continued business relationships. | Often given at the end of an evaluation period or after certain criteria have been met. |
In summary, Cashback aims to accelerate incoming payments, while discounts primarily reduce the sales price and bonuses often serve as an incentive for continued business relationships or the achievement of specific goals.
The Cashback is usually deducted from the gross amount of the invoice, i.e. including VAT. This means that the discount is applied to the total amount payable by the customer.
A key difference between Cashback and discount lies in the reason and timing of their granting. A discount is typically granted before the purchase as a price reduction and serves to promote sales or make certain products more attractive. Cashback, on the other hand, is offered after the purchase and aims to incentivize faster payment of the invoice. Discounts influence the price directly, while Cashback are more of a payment management tool.
The posting record for Cashback depends on whether the Cashback is granted or taken. If a company grants a Cashback, it posts the discount amount as an expense. The entry is then: Liabilities for sales deductions and VAT. If a company takes a cashback, the cashback amount is posted as a reduction in expenses for the services purchased. The corresponding posting record is then: Accounts payable and input tax to bank or cash office. These postings adjust the original invoice total accordingly.
A standard Cashback varies depending on the industry and the agreement between the business partners, but is often between 2% and 3% of the invoice amount. These discounts are usually granted if payment is made within a short period of time, such as 10 to 14 days after receipt of the invoice. These terms are intended to improve the seller's liquidity by encouraging the buyer to pay more quickly.
A cashback credit is a term used to describe the situation where a company decides to take out a loan to pay its supplier invoices early and thus take advantage of a cashback. The basic idea is that the cost of the credit (i.e. the interest) is less than the financial benefit realized from the Cashback. This strategy can effectively reduce the overall cost of procuring goods and improve the company's liquidity.
