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Dynamic discounting or cards to boost payables cash flow?

A report published by Paystream – 2017 AP & Working Capital Report – has picked out some trends in supply chain finance and working capital for payables cash flows.

As the report notes, it's almost impossible to balance the needs of the buyer, who aims to increase its day's payables outstanding (DPO) by paying suppliers later, with the needs of the supplier, whose goal is to decrease their day's sales outstanding (DSO) by speeding up their collections cycles. The two parties tend to pull in opposite directions and yet they have to find a way to work together so they can both benefit. Paystream's report provided the following findings.

Early payment discounts hard to capture

The majority of organisations – 69 per cent – manage to capture early payments discounts only some of the time, 13 per cent said they never manage to capture discounts while 18 per cent said they always capture early payment discounts.

One cause of the inability to consistently take advantage of early payment discounts is inefficiency in procure-to-pay and payables processing. Lengthy approval cycles, missing information on invoices and lost invoices are some of the problems companies face, causing them to lose out on these discounts. Other causes include a large number of exceptions, manual routing of invoices and decentralised invoice receipt.

Suppliers don't always offer discounts

According to Paystream's report, suppliers often don't offer discounts when the buying organisation has a poor record of meeting payment deadlines or if they have limited visibility into the statuses of their invoices or payments. The report shows that 43 per cent of buyers said that a small minority of their suppliers (fewer than one in 10) offer some kind of early payment discount. And the vast majority of buyers – 78 per cent – said that fewer than half of their suppliers offer favourable terms for early payment.

Dynamic discounting software encourages buyers

Dynamic discounting management (DDM) uses software that interfaces between the buyer and supplier to offer a choice of discount models, the most common being a sliding scale so that as the payment deadline approaches, the discount offered decreases. This system allows both buyer and supplier to exert some control over the payment and discount offered. Paystream's data shows that buyers with a DDM system in place are more likely to be offered early payment discounts by their suppliers. However, only 9 per cent of organisations say they use DDM as a method for capturing discounts and rebates.

Popularity of payment cards

In contrast, 40 per cent of organisations said they use purchasing cards to capture early payments advantages. Paystream's report states: “By putting supplier payments on commercial cards, buyers are essentially extending their DPO with credit. Rather than adhering to suppliers’ typical 30-day invoice payment terms, paying via card can extend the float beyond 30 days. Although p-cards are more widely used, another type of commercial card, Virtual Accounts (VAs), are among the most effective payment methods for enhancing working capital programs, and are rising in popularity among organizations trying to gain savings and more control over cash.”

CTMfile take: How much attention do you pay to whether your organisation receives early payment discounts? How do you ensure you receive favourable terms? And if you're a supplier, how important is it to offer discounts to buyers?

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