Dynamic Discounting
A vendor portal can allow you to setup a fully-automated dynamic discounting program that can result in millions of dollars in savings.
What is Dynamic Discounting?
Dynamic Discounting is a program set up by a company that establishes a process by which buyers and sellers can “dynamically” alter the standard terms of payment, within an agreed-upon set of parameters.
The basic component of a dynamic discounting program (or Accelerated Payment, as some companies call it) is the ability for the buying organization (you) to offer early payment for a stated discount to its suppliers. The discount offered can be changed as the cash flow position of the buyer changes, and the percentage of the discount will decrease as the transaction becomes closer to the normal payment date. These programs are a win-win for both the buyer and suppliers: the suppliers can choose to have all (or select) invoices paid early to augment their cash position. Buyers can generate substantial savings through aggressive discounting of payment obligation.
An Example:
You have 70mm in 30-day AP this month. You decree, via your vendor portal (which will automatically alert your vendors), that 5mm is available right now for immediate payment, at a small discount. Several vendors take you up on your offer, as it provides them with an immediate cash influx. The system can be administered to change parameters as conditions are met (the 5mm is used up, etc.)
What are the Benefits of Dynamic Discounting?
Taking a closer look at the benefits of dynamic discounting can help us understand why implementing a dynamic discounting program can generate sizable economic advantages for the buying company, while reducing DSO, and increasing cash flow for the vendor/supplier:
Advantages to Buyer
- Offer early payment for goods and services in exchange for substantial discounts
- Achieve savings of 1/10th of 1% of annual spend, or $1 million for every $1 billion spent
- System designed to allow you to control:
- Percentage of discount
- Amount of cash dedicated to program on a daily, weekly or monthly basis
- Which suppliers, invoices, product or service categories are eligible to participate
- Ability to negotiate better contracts with vendors and suppliers
Advantages to Supplier
- Flexibility of discounting some or all receivables
- Eliminates need for high-cost financing options
- Better cash flow forecasting capability
- Reduces the ambiguity of the timing and amount of payments
Who Should Implement a Dynamic Discounting Program?
There are a few things to consider when deciding if implementing a dynamic discounting program is right for you. The cost saving benefits of doing so are evident by the benefits listed above. In addition, according to PayStream Advisors, “buyers who report achieving these discounts tend to pay their suppliers about 10 to 15 days before the invoice is due.” Suppliers like that.
One of the most important factors to evaluate while considering whether or not to implement a Dynamic Discounting program at your company is the current state of your Accounts Payable and invoice payment systems. The key to taking advantage of this dynamic and lucrative program is having streamlined and automated payment processes (like a Vendor/Supplier A/P portal). ICG Consulting can help your organization assess its current processing environment and help you decide whether a dynamic discounting program is right for your company.
Find Out if Dynamic Discounting is Right for Your Business
ICG Consulting offers expertise on dynamic discounting, and can discuss with you how dynamic discounting can be implemented within an ICG supplier portal. Contact us today and we can start to discuss your company’s needs, and determine if dynamic discounting is right for you.
If you would like to view a recorded webinar on Vendor / Supplier Portals and Dynamic Discounting please fill out the form below with the message “please send me webinar link” in the message section. Be sure to fill out the form completely before submitting.
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