Dynamic Discounting ROI: How Accounts Payable Can Become a Profit Center

June 5, 2014 Accounts Payable Adam

ap-adam-ap-profit-center

Dynamic discounting is not a new concept, yet when done effectively, it can play a pivotal role in transforming accounts payable (AP) from a cost center into a profit center.

With dynamic discounting, both buyers and suppliers can benefit by working together on payment terms that reduce the cost of borrowing and improve both party’s cash positions. With today’s technology enabling automation, we are better equipped to strategically compress the payment cycle, capture a higher portion of discounts available, and optimize working capital.  

Plus, with interest rates at nearly zero percent, we’re all trying to find ways to add to the bottom line. By turning every invoice into a revenue opportunity, we not only increase discount capture and optimize invoice processing, we strengthen supplier cash positions and relationships, and ultimately, our supply chain.

In fact, when I became a Dynamic Discounting Superhero, I discovered a variety of valuable discount options that benefit both buyers and suppliers, including:

  • Buyer-initiated discounting where terms agree to rates up front and invoices are automatically paid as soon as they are approved in exchange for a discount

  • Supplier-initiated discounting where suppliers opt for early payment on an invoice-by-invoice basis or they choose to automatically accelerate all payments at a previously accepted rate

  • Ability for buyer to group suppliers and strategically customize discount rates based on many factors including, competitive analysis on market rates that the supplier would typically receive

Additionally, a SaaS self-service supplier portal helps suppliers better manage their cash and early payments with tools that allow them to select when and how much cash they need.  To optimize cash flow, the portal then recommends which invoices should be accelerated and what the discount would be.

Other key benefits for suppliers include:

  • Notification when invoices are approved allowing suppliers to decide if they want to be paid early

  • Eliminating the need for expensive factoring or card companies to supplement cash flow needs

As a Dynamic Discounting Superhero, I have come to rely upon a simple and powerful segmentation tool for my ERP system.  This innovative solution enables me to group suppliers into early payment groups with different interest rates and different liquidity thresholds, thus maximizing discount relevance and capture.

I also have an option to bring in third-party financing for selected groups of suppliers through supply chain finance or enhanced discounting.  

As an additional benefit, my team has experienced minimal change management as the tool was embedded into the ERP system that our AP department already uses, so it’s honestly a fast and seamless process.

You too can become a Dynamic Discounting Superhero with P2P solutions.  For more information, contact us.

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