A recent Wall Street Journal article titled “P&G, Big Companies Pinch Suppliers on Payments,” sheds light on companies planning to add weeks to the amount of time it takes to pay suppliers, in an effort to free up cash to fund investments in new factories overseas or help pay for stock buybacks. This new flexibility will come at the expense of the suppliers that supply the materials and services.
The move highlights how America’s biggest companies continue to build on the aggressive cash management practices they adopted in the wake of the credit crisis. Effective cash management and working capital are two factors that are driving the increase in financial automation solutions. Invoice automation pays dividends to both buyers and suppliers in the form of liquidity and control. Through automation, buyers can manage their free cash and invest it for big returns in the form of early-payment discounts to suppliers. Suppliers can benefit by accelerated collection of receivables.
Early payments or Dynamic Discount Management (DDM) solutions allow companies to invest their cash safely at rates that can significantly exceed returns from many other traditional investments, including the S&P 500, capital purchases, and even gold. Many payables departments with paper invoices or decentralized receipts suffer from lengthy approval and payment cycles, which prevent them from optimizing their financial gain from discounts.
While discounts were historically driven by suppliers as an incentive to secure early payment, enhanced visibility into invoice status via automation and collaborative networks are turning the tables and enabling buyer organizations to proactively propose early settlement discounts to suppliers. Third-party financing enables buyers to extend their payment terms through the injection of third-party capital without adversely affecting supplier relations. Suppliers gain additional cash liquidity and stronger balance sheet positions.
Invoice Approval Cycle Times
For many buyers, timely invoice approval was not a priority prior to the availability of DDM tools. Faster approvals didn’t necessarily lead to accelerated payments. In fact, during the recent financial downturn, extending payment cycles allowed many large buying organizations to improve their liquidity. Successful DDM depends upon fast invoice processing – ideally less than 14 days. Since only approved invoices can be used for DDM to work, the volume and number of invoices awaiting payment is the critical ingredient to unlocking DDM opportunities.
Electronic Processes Drive Supplier Interest
Most companies list supplier resistance as the biggest obstacle to implementing DDM. eInvoice automation that makes the solution easy for the supplier to benefit can help overcome that obstacle. Many solutions offer self-service supplier portals integrated with DDM, which provides valuable services to both suppliers and buyers. Since DDM solutions generally accelerate the exchange of information between trading partners and provide improved visibility and control over financial transactions, suppliers’ ability to upload, view and track invoices in real time as they make their way through a buyer’s workflow process, improves the visibility and control they have over AR processes.
Suppliers receive notification immediately upon completion of a buyer’s payables approval process, allowing them to monitor and assess receivables in real time. For the buyer, this translates into a reduction in resources required to resolve discrepancies and respond to inquiries. Both buyers and sellers receive payment data and remittance detail electronically facilitating reconciliation of payables and receivables. In particular, companies holding excess liquidity will find dynamic discounting attractive, as it presents an opportunity to make short term, risk-free investments in their own supply chain at rates superior to most other investments. A dynamic discounting solution will also result in a reduction of AP in the short term but with a lower spend due to discounts earned. Seventy-two percent of companies surveyed cited lower processing costs as a major benefit of implementing a DDM solution. Typical savings can range from $1 million to $5 million per billion dollars in annual spend discounted.
Electronic payments, the final step in a fully-automated purchase-to-pay solution, are critical to dynamic discounting, because they accelerate the payment cycle and provide the fraud protection and control required to capitalize on the various discount opportunities discussed below, see Figure 4. ePayments can also significantly lower processing costs by removing the need for printing and mailing checks. Less paper reduces opportunities for fraud. Supplier notification and vendor self-service options reduce the number of supplier inquiries and exceptions. Online search and retrieval tools aid in payment verification and collaborative dispute resolution, as well as compliance with all regulatory requirements.
Enhanced visibility into the timing and amount of payments aids in superior cash flow forecasting capability for suppliers while delivering better cash liquidity and stronger balance sheet positions for suppliers without relying on high cost financing alternatives. Buyers can extend payment terms; suppliers can accelerate cash conversion cycles.
Despite the benefits associated with electronic payments, many companies still issue payments via paper checks. This cumbersome manual-based process impacts the number of discounts captured since it slows the invoice process time resulting in late payments and missed discounts, see Figure 5 for the primary reasons companies do not use electronic payments.
Download a complimentary copy of PayStream’s 2013 Dynamic Discount Management: Moving Toward Mainstream report today to learn more about effective cash management and working capital through the implementation of automation initiatives.
