Managing dealer schemes and discounts

Common types of dealer schemes

Where the money leaks

• A salesperson promises a rate that is not in any written scheme.
• Slab discounts applied on order value before returns, so the dealer keeps the slab after returning goods.
• Target schemes calculated by hand from a spreadsheet, with errors that nobody checks.
• Cash discount allowed even though payment came late.
• Old schemes never formally closed, so dealers keep claiming them.
• Credit notes not issued on time, so the dealer deducts the amount from payment, and your ledger and theirs never match.

Worked example: layered discounts

List price of a ceiling fan: ₹2,400. Dealer type A gets 12% trade discount. Orders above 50 pieces get an extra 3% slab. The scheme says the slab is applied after the trade discount.

• After trade discount: 2,400 × 0.88 = ₹2,112
• After slab: 2,112 × 0.97 = ₹2,048.64

Note that 12% plus 3% layered is about 14.6% off list, not 15%. Write down whether discounts are layered or added, or you will have disputes on every bill.

Now the effect on your margin. If your landed cost is ₹1,850, your margin falls from ₹262 per piece at the trade rate to ₹198.64 with the slab, a drop of about 24% in rupee margin for a 3% extra discount. See gross margin vs markup for how to check this before announcing a scheme.

A scheme control checklist

1. Every scheme has a written circular: code, products, dealer types, slabs, start and end dates, how it is settled.
2. Trade and slab discounts go into a price list so they apply automatically on bills, not from memory.
3. Target schemes are calculated from net sales after returns and credit notes.
4. Cash discount is given only when payment is received within the stated days; check the receipt date, not the dealer's claim.
5. Settlement credit notes are issued within a fixed number of days after the period closes.
6. A monthly report shows total scheme cost as a % of sales, by scheme.
7. Expired schemes are closed in writing and removed from the price list.

GST points to keep in mind

Discounts shown on the invoice reduce the taxable value. Discounts given after the sale, such as target schemes, need conditions to be met to reduce GST, and are usually passed by credit note. Free goods also need care. Our guide on GST on discounts and schemes explains these points; confirm your structure with your CA. This is general information, not tax advice.

Judging whether a scheme worked

After each scheme, compare three things with the same period last year or the period before the scheme:

• Extra sales: did volume rise, and by how much, for the scheme items?
• Scheme cost: total discounts, free goods at cost and credit notes issued.
• Hangover: did sales dip after the scheme because dealers stocked up early?

Example: a quarterly target scheme cost ₹2,40,000 in credit notes. Scheme items sold ₹38,00,000 against ₹30,00,000 a year earlier. At a 12% gross margin, the extra ₹8,00,000 of sales earned about ₹96,000 of gross profit, less than the scheme cost. Unless the scheme won new dealers or cleared stock you needed to clear, it lost money.

Applying schemes with Tally and Cashflow OS

Cashflow OS has price lists with dealer types such as A, B and C and layered discount rules, which fill rates automatically in quotations, sales orders and vouchers. Orders can be posted to TallyPrime with the right rates and GST, and credit notes can be created from the phone or web. That removes much of the manual rate-setting where leaks start. See price lists.