Most lumberyards offer a discount for early payment. It’s usually described as “2% 10/net 30,” which means that if you pay by the 10th of the month, you get a 2% discount; if you pay between the 11th and the 30th, you pay the full amount. (If you pay after that, you may pay penalties and interest.) In a session at this year’s JLC Live conference in Providence, R.I., Leslie Shiner, owner of The Shiner Group, a small-business consulting and training company based in California, explained that this amounts to a 2% discount for 20 days. Here’s how she thinks about it.
Imagine that you’ve deposited $100 in a bank account and, after 20 days, you have $102. You take the $2 and put it in a cookie jar (to keep things simple, we’ll ignore compound interest). After 20 more days the $100 you left in the bank account has again grown to $102, and again you put $2 in the cookie jar, which now holds $4. If you do this over and over again for the whole year, you will make 18.25 (365 ÷ 20) deposits in the cookie jar, for a total of $36.50 ($2 x 18.25). That’s an annualized interest rate of 36.5% ($36.50 ÷ $100).
Shiner has another way of looking at it that involves solving the following algebra problem: 2% is to 20 as X% is to 365. Recalling our high school algebra, if we set the problem up as X ÷ 365 = 2 ÷ 20 (1), then reduce the right side of the equation (2 ÷ 20) to 0.1, we are left with X ÷ 365 = 0.1 (2). Multiplying both sides by 365, we get X = 365 x 0.1 (3) or X = 36.5 (4). As an annualized rate of interest, that’s a pretty good deal.