AP as a Profit Center: Are Card Rebates Hidden Treasures or Fool’s Gold?
Stephanie Dula 1 Oct 2015Card rebates are often touted as straightforward bottom line builders, but can they actually add cost to the supply chain? In our expert panel session held last month at INNOVATE 2015, we heard from two sides of the debate, covering both the positive and negative impacts associated with purchasing and virtual payment accounts. Can AP really be a profit center, and if so, is there a measurable effect on costs in the supply chain? PayStream’s lead payments analyst shared the latest growth statistics on card spend, costs and the Perfect Payment Index (PPI) for payers. Here’s a brief synopsis of some of the main strategies used by our expert panelists to optimize payments to provide maximum benefit without placing too much burden on suppliers.
The Home Depot Strategy
Debbie Rich-Walker, Senior Manager of Finance at The Home Depot explained her company’s philosophy regarding this delicate balance as a responsibility by the buyer to hold all things constant. Her merchants reject the practice used by some buyers of stretching out payment terms but instead prefer to negotiate the best terms possible with the supplier. The organization is able to consider the revenue stream resulting from rebates and the revenue stream resulting from a robust vendor finance program as two separate functions, working together to make sure that any extra costs are not coming back to the company.
The savings they have achieved through their voluntary vendor finance program remain significant, there’s no ‘beating up’ of the suppliers through stretched out payment terms, and the company’s merchants get credit for an increase in rebates. The suppliers are able to gain financing for relatively low cost compared to factoring, and they choose when to opt in, allowing the organization to enjoy incremental rebates, creating a true win-win.
This focus on a more collaborative partnership between buyers and suppliers, as opposed to a competition, was a theme we heard repeatedly throughout the INNOVATE Summit. But what about purchasing cards and virtual accounts? Is it possible to create a true win-win with the use of a card that provides a discount for the buyer, or is it more likely that the added cost to the supplier will find it’s way back to the buyer eventually? Additionally, will suppliers be incentivized to sign up in the first place?
A Supplier’s Perspective
Mickey Crane, head of Shared Services for TÜV SÜD America Inc, has responsibility for his company’s receivables, provided the supplier point of view. In response to Henry’s question, “do you accept virtual card payments on order-to-cash?” he answered no, due to the cost of processing and the size of the organization. Anytime a payment is put to the side to process separately, time and processing costs increase, hence the reluctance of many organizations like his to accept virtual payments. Although, he did explain that should a significant portion of his customer base request it, he would have to reconsider.
Payment Solution Provider Perspective
Our panelists agreed that there is no silver bullet that makes AP into a revenue generator overnight, rather a best practice is to diversify the options you offer suppliers, again to treat the relationship as a partnership rather than a forcible mandate. After all the hype we’ve seen around card rebates, how do the banks and card issuers respond? Luckily we had Robert Kaufman of US Bank on hand to speak direclty from the payment solution provider perspective. He suggested that buyers use a very simple, but effective, strategy to break down the options to your suppliers. Offer them a card payment to be delivered within 5 days, if they aren’t interested, offer them an ACH payment within the same time frame, but with a 2% discount. If they are not interested in that either, offer a check payment to be made within 60 days. This strategy has provided good outcomes for many organizations. How do you think this approach would work in your organization?
Robert also agreed that virtual payment programs are not for everyone. There are some industries where it’s the norm and where companies should take full advantage of rebate programs. As our analysts have discovered through countless consulting projects, there are a few best practices to follow when deciding which programs to implement. They’ve developed the Perfect Payment Index (PPI) for just these situations. The PPI breaks down the conditions that organizations should meet to optimize payment terms, ensuring most payments are on-time and electronic and maximizing discount potential.
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