Two and a Half in the Hundred

Dear friend,

The riddle first, as the tradition demands. Back in the old town a builder bought his timber on account and settled when it suited him, and every merchant had a line about terms at the foot of his billhead, copied word for word off the man he was apprenticed to.

Two timber merchants, the same deals and battens, the same yard, the same builders buying on account.
One printed on his billhead two and a half in the hundred for payment within the week.
The other printed fourteen days, and nothing off for anybody.
Both sold four thousand pounds of timber in the year, to much the same men.
Both had their money, in the main, inside the first three weeks.
Same trade, same timber, same prompt payers. Why was one of them seventy pounds poorer?

Hold your answer. Story time.

The Story

Two timber merchants in the town I have never named, both with sound stock and a scale of prices they could defend. A builder there did not pay as he bought. He took his deals away on Tuesday, put them into a roof by Friday, then waited to be paid himself, and the merchant stood at the end of that chain holding everybody's patience.

The first merchant dealt with it as the trade always had. Across the foot of his billhead, in small type, stood the words two and a half per cent for cash within seven days. He had never decided on that line. It had been on his master's billhead in 1849 and it was on his, and when the printer asked whether anything was to be altered he said no.

It worked, in the sense that a thing works while nobody examines it. His good builders took it, being the men with money in the bank and a clerk who kept the book straight. His poor payers did not take it at all. A man waiting on an architect for ninety pounds will not find money in a week to save two and a half in the hundred, and he paid in the sixth week and apologised pleasantly.

So the discount sorted itself, and what it sorted was this. Of the four thousand pounds he sold on account, two thousand eight hundred went to men who took the terms and paid inside the week. Seventy pounds came off his invoices that year, off the accounts of precisely the customers who had never given him a day's anxiety. It was more than he paid the man who loaded his carts.

The second merchant had the same builders and the same trouble, and went at it from the other end. He made out his invoice the afternoon the load left the yard instead of waiting for the month to close, which quietly recovered a fortnight before the clock had started. His billhead said fourteen days. On anything above fifty pounds he asked a third with the order, while the order was being written and a man is agreeable. On the fifteenth day, if nothing had come, a note went out naming the sum and the date, and no second load left until the first was settled.

By the third week of each month his money was in, much as his rival's was. Neither man was clever. One had bought the speed and one had arranged it, and the difference sat in a narrow column the first man had never added up.

In fairness, the seventy pounds did buy something. He was spared the chasing, which he hated, and in the February of the hard frost, with cash in the yard and the quay full of Baltic deal nobody could pay for, he bought two hundred pounds of timber at a figure that made his year. Set that against the loss by all means. But he could not have told you the rate he was paying, and a man who does not know the rate cannot say whether he bought well or was robbed for twenty years.

The Lesson, Since You've Earned It

A discount for early payment is a loan you are taking from your own customers, and the rate is one you would refuse from any bank in the county. It is hidden only because the money never looks like interest. It arrives as a deduction in a narrow column, a shilling here and three there, announcing nothing.

So do the announcing. Take what you give away, divide it by the days it buys you, and multiply up to the year. Two and a half in the hundred, to be paid five weeks sooner than you otherwise would have been, is two and a half for five weeks, and there are better than ten such periods in a year. You are paying over five and twenty in the hundred for the use of money already yours. The bank in the square discounted good bills at five, and his own timber factor allowed him a month on everything and charged nothing for it.

Then look at who takes it, because that settles the question. It is taken by the customers who were going to pay you anyway, and it cannot be otherwise. A man must have the money ready to take it, and a man who has it ready is not your difficulty. The slow payer is slow because he has not got it, or because he pays whoever presses hardest, and neither condition is altered by two and a half in the hundred. You are rewarding the behaviour you already had, and paying nothing to change the one you wanted changed.

The cure is upstream every time, and it costs nothing. The date on the invoice, the third with the order, the short terms, the note on the day the money falls due. All of it is recognising that the wait for your money is part of your price, and arranging that wait rather than purchasing your way out of it. Watch too for the customer who deducts the two and a half and pays in the sixth week regardless. That is no discount. It is a reduction in your price with a date on it that nobody honours.

Two cautions. The rate is sometimes worth paying, and I will not pretend otherwise. If your alternative is borrowing at a worse figure, or if money in hand buys you a saving larger than the discount, as it did in the February of the frost, then you are not discounting. You are buying, and the test is whether you can say what you bought and what it cost. The second caution is that the line must not be withdrawn on a Monday morning from a customer whose habit of buying rests on it. Give it up at your next review of prices, with notice, in writing. And do not cover a discount everybody takes by raising your figures, or your price is wrong for everybody who pays on the day.

Three questions, for the week in front of you:

1. What is the yearly rate on my own terms? The discount, divided by the days it brings the money forward, multiplied out to a year. The figure usually lands between twenty and fifty, and the shock of seeing it is the argument.
2. Who took it last quarter, and would they have paid me anyway? Go through the invoices rather than guessing. If the same four names take it every month, you are not buying speed, you are making a standing gift.
3. What would bring the money forward for nothing? An earlier invoice date, a part payment with the order, fourteen days instead of thirty, an easier way to hand you the money. Spend an evening on those four before a penny on the fifth.

The Answer to the Riddle

Same trade, same timber, same prompt payers, and both had their money inside three weeks. Why was one of them seventy pounds poorer?

Because he had bought what the other arranged. The speed was identical, and so were the customers who provided it. One paid two and a half in the hundred to the very builders who settled without being asked. The other dated his invoices properly, took a third with the order and sent a note on the fifteenth day. Seventy pounds is what a printed line costs when nobody adds it up.

The verse:

Two and a half in the hundred, in the small type at the foot,
And it goes to the man who would have paid you anyhow.
Count the days it buys you and reckon up the year,
And no banker in the county would dare to ask such a rate.

Until next time. Go and take one of your own invoices, work out the yearly rate on the discount printed at the foot of it, and write that figure in the margin before the day is out.

P.S. The arithmetic runs the other way as well, and that side is the best return in your trade. When a supplier offers you two and a half for payment inside the week, taking it earns the same five and twenty in the hundred it costs you to give. No stock and no advertisement pays at that rate with that certainty. Look at what is offered on the invoices coming in, not only at what you print on the ones going out.

Also in the archive: Made for a Colder Winter, Half a Crown Each Monday and The Prices Nobody Argued With.