Business Payments In A Digital Economy: It’s About Timing

Chris Rauen

“When will I get paid?”

For me, the answer to that question is generally “in the middle and end of the month.” For many suppliers, though, the payment date remains a mystery. When they call their customers about payment status, the frenzy that often results may get them an answer. Or it might not.

In a digital economy, the opportunity for trading partner collaboration and self-service eliminates these calls about payments, leaving organizations more time for higher-value work. For the finance and treasury teams, one activity that can have a dramatic impact on business performance involves payment timing.

That’s because your ability to time payments can be as valuable to your business as increasing sales. Pay sooner to take advantage of early-payment discounts, and you can earn double-digit cash returns, risk free. Proactively manage payment terms, and you can extend your days payable outstanding (DPO) and free up working capital to support your business.

Cash in on discounts

For organizations with cash on hand, few opportunities compare to the cash return from early-payment discounts. That isn’t lost on the procure-to-pay lead at a global tire manufacturer. He touts the annualized earnings on discounts as so attractive that he would take them any time over DPO extension.

At BC Hydro, e-invoicing over a supplier network is helping to improve on-time payment performance and expand early-payment discounts. According to Hanif Dhrolia, BC Hydro e-commerce manager, many BC Hydro suppliers have embraced the company’s early-payment discount program to improve their cash flow and days sales outstanding (DSO).

That’s another lure of dynamic discount programs: they appeal to buyers and suppliers alike. What’s more, the flexibility of today’s dynamic discount programs go far beyond traditional, static discount programs. Here are just a few advantages:

  • Offer prorated or dynamic discounts, up to the invoice due date
  • Control the amount of cash to apply to a program
  • Set the minimum rate of return you are willing to accept for these discounts
  • Capture discounts on electronic invoices and those you process manually
  • Target new groups of suppliers that haven’t accepted discounts before

What happens when you combine an early-payment discount program with a payment term-optimization initiative? Typically, a higher uptake of discounts, and the ability to free up working capital by extending DPO. For every $1 billion in payables you extend by 15 days, you can generate more than $40 million in free cash flow. For some organizations, the scope of a working capital management initiative can involve hundreds of millions of dollars in free cash flow.

Consider some of the options for putting this cash to work:

  • Pay down debt
  • Open a new store or manufacturing plant
  • Increase research and development
  • Fund a new product line
  • Support mergers and acquisitions

If none of this is under consideration at your organization, it certainly should be. When you take a closer look, you’ll realize that, when it comes to managing payments, cash, and working capital, it is about timing.

Join us on Oct. 5 for a complimentary live Webinar. You’ll hear Hanif Dhrolia, BC Hydro manager of eCommerce, discuss procure-to-pay transformation at BC Hydro and the importance of early-payment discounts to increase cash earnings while supporting supplier cash-flow needs.

Learn how organizations are gaining instant financial insights and using them to make better decisions—both now and in the future. Register now for the 2017 Financial Excellence Forum, Oct. 10-11 in New York City.

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Chris Rauen

About Chris Rauen

In his role at SAP Ariba, Chris Rauen educates procurement, finance, and shared services professionals on the business value of accounts payable automation, procure-to-pay transformation, and collaboration via business networks. Chris has addressed these topics at finance and shared services conferences, in articles for trade and business publications, and in blogs for online communities. Chris has more than 15 years of experience in e-payables, and holds a B.A. in Economics from the University of California, Santa Barbara.