Dynamic discounting can save your company millions of dollars by offering discount incentives for suppliers who accept early payments in exchange for a deduction off the full payment due.
This is an efficient way to optimize your cash flow in a fluctuating real-time environment. In low interest rate times where returns on cash are difficult to come by, treasurers and financial executives can generate tremendous returns with this solution.
It’s a cost-effective upgrade for both the your company and your vendors. Allow 24/7/365 payments and collaborate with your vendors easily, through our vendor portal or supplier portal discounting approach.
What is Dynamic Discounting?
Dynamic Discounting is a program set up by the buying company that establishes a process by which buyers (customers) and sellers (suppliers) can alter the standard terms of payment “on the fly” in a highly dynamic, flexible, real-time environment.
You now have a voluntary system where the buyer offers the vendor an early payment discount. This approach is a big shift from the normal supplier discount paradigm where vendors offer the buying company fairly static discount terms on a “take it, or leave it” basis.
Dynamic Discounting is an efficient way to optimize cash flow in a highly dynamic, real-time environment.
For instance, the buying company can offer a significantly higher discount for paying some or all invoices many days before the due date and a smaller discount for paying invoices as the payable ages closer to the standard due date. Based on the cash needs, borrowing costs, and other factors for the vendor they may choose some invoices for early payment while allowing others to go through their normal payment processes. The dynamic discounting process happens within ICG’s vendor portal:
- Supplier submits invoice for payment
- Payment status appears in vendor portal or supplier portal
- Buyer offers discount for early payment
- Supplier views and accepts early payment offers on vendor portal
- Vendor portal notifies buyer
- Buyer pays within 24 hours via electronic payment
Benefits of ICG’s Dynamic Discounting Solution
With Dynamic Discounting, the savings to the buying company can be tremendous and the benefits to the vendor encourage a high level of participation.
It also enables you, the buying organization, to offer targeted suppliers early payments in exchange for discounts on the payables due at a later date. These programs are a win-win for both the buyer and suppliers.
- Buyers can save millions of dollars by taking advantage of paying less for goods and services through an aggressive discounting program. The dollars invested in a dynamic discounting program generate a sizeable ROI.
- Suppliers can optimize their cash flow, reduce high borrowing costs and have predictability in the payment cycles.
The amount of discount offered, what invoices it will be offered for and the timing of those offers are completely flexible. They can also be changed to fit your current cash strategy and to maximize your return on your short term cash investment.
For instance, the discount offered can be changed as the cash flow position of the buyer changes. Additionally, the percentage of the discount can decrease as the transaction becomes closer to the normal payment date.
Who Can Benefit from Creating a Dynamic Discounting Program?
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.” Since dynamic discounting allows for both the buyer and the vendor to maximize cash flow and generate savings, all parties gain significant financial benefits.
A few things to consider before implementing a dynamic discounting program:
- “Have we implemented an effective Accounts Payable Automation process?”
- “Do our vendors have a vendor portal and use electronic invoicing?”
- “Does our workflow management software support dynamic discounting?”
Get the ICG Level of Expertise
Dynamic discounting is worth a look for every business that manages a significant number of invoices each month, but you must have efficient AP processes in place before implementing a dynamic discounting program. Some of our clients have justified upgrading to electronic payment processes for the sole financial benefit of implementing a dynamic discounting program.
Since it’s important to have automated AP processes in place before launching a dynamic discounting program, the first step may be implementing a comprehensive vendor payments solution with a corresponding vendor portal. Every business has unique needs, so contact ICG now and let us help guide you through the process.