How Does Dynamic Discounting Work?
- Invoices are processed, approved or matched and ready for payment
- You designate a pool of money to be used to invest in a dynamic discounting program
- You decide what invoices to designate for early pay using various criteria, i.e., commodity, category, vendor, invoice amount, etc.
- You decide what level of discount you will offer and establish time lines for acceptance (discount can automatically decreases as the payment nears due date)
- Suppliers go to a vendor portal or supplier portal to view discount offers
- Supplier can accept or reject discount offers on an invoice by invoice basis
- Once accepted, payment is made in 24 to 48 hours
Traditional, portal based Dynamic Discounting
In a traditional, or vendor portal based dynamic discounting program, a vendor portal is used to communicate discounted payment offers and the vendor logs in to view these offers and accept or reject some or all of the discounted payment offers made by the buyer. The portal then communicates all accepted offer details to the the back-end financial system to generate the appropriate entries and the payment is made.
Return on Investment
You have $70mm in short term cash earning a 1% to 1.5% annual yield. You decide to invest $10milion in your dynamic discounting program by offering $10mm worth of accelerated payments for a discount. Over the next 30 days several vendors take you up on your offer, and you pay out the $10mm in early payments. Let’s say you achieve a VERY CONSERVATIVE average on those payments of a 4% discount paid 10 days early. You have now achieved an annualized return of 73% on that $10 million you invested versus the 1 to 1.5% return your were getting on that short term cash.
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% to 3/10th of 1% of annual spend, or $1 million to $3 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 and 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 AR 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.”
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 Portal, Supplier Portal, AP automation, BPM and workflow). ICG Consulting can assist your organization in assessing 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 your vendor portal or supplier portal.
Contact ICG today to start discussing your company’s needs, and determine if dynamic discounting is right for you.