How can you achieve a successful dynamic discounting process?
- 05 Oct 2016
It was recently estimated by the Hackett Group that small business in the UK are spending 10% of their time chasing payments, with 60% of their invoices going overdue. In addition, the research revealed that 32% of the respondents were planning to extend their supplier terms. Will the dynamic discounting trend help to improve these statistics behind the worrying late payments trend, where buyers negotiate discounts with their suppliers for earlier settlement?
Many large organisations now use long settlement terms to improve their working capital positions, extending out the number of days payable outstanding. Whilst extending payment terms, up to 120 days in some cases, is good for liquidity of the large corporations, it piles on the financial pressures for the supply chain, especially smaller businesses.
However, there is a new trend which is slowly spreading its benefits across the supply chain – dynamic discounting. It offers both the supplier and the customer a financial upside, whereby the buyer pays earlier and in exchange the seller offers a scaled discount based on how quickly they are paid.
At Wax Digital we’ve seen this first hand. Our recent Procurement Innovation Pathway research has revealed that 27% of procurement professionals already use dynamic discounting with selected suppliers, 30% plan to start doing so in the next 12 months and 20% highlighted it as a long term objectives for the future.
- Scale – agreeing which suppliers are in, and which are out. A big bang, or phased based on size of spend? Usually it comes down to the resources required to administer a scheme versus the savings the buyer can expect in return.
- Strategy – some buying organisations use dynamic discounting as a tool to extend out payment terms to those suppliers who decide not to participate. Procurement teams need to have a clear policy for any scheme, so suppliers know the options available to them.
- Cashflow – financially, you need to consider how well your organisation is placed to speed up invoice payments. It will need consultation with finance and usually a business case to show how the longer term cost benefits of dynamic discounting can outweigh the inevitable initial pressure on cashflow.
From a practical point of view, in order for any organisation to be able to take advantage of dynamic discounting, it will need to have effective processes and systems in place to ensure invoices can be paid promptly. This means clear sight of every supplier transaction, from the point of purchase by the employee right through to accounts payable being given the green light to make payment. Procurement systems do exactly this job for thousands of businesses worldwide, and you can read about some of our own customer success stories here.