When it comes to payment timing, it’s no surprise that buyers and suppliers would have different perspectives. Buyers prefer to pay later, while suppliers want to be paid sooner.
What are trading partners to do?
In a digital economy, where buyers and suppliers can collaborate over a business network, there are more options for managing payment timing to the benefit of both parties. Buyers flush with cash and earning little on short-term investments can take advantage of early-payment discounts, including dynamic discounts that extend discounts on a sliding scale past the standard discount date.
These discounts typically earn double-digit annual returns, with no risk to the investment. Suppliers can accept all discounts automatically, take discounts only as needed, or counter with discount proposals of their own over the network.
For buyers, the potential downside is a negative impact on days payable outstanding, or DPO, from accelerating payments for discounts. According to a supply chain finance report from Strategic Finance, the treasury consulting firm, here are average DPO breakdowns by region:
- North America: 51 days
- Europe: 59 days
- Asia: 73 days
- South America: 75 days
- Worldwide average: 64.5 days
To optimize working capital, many organizations are examining their payment terms, especially those with DPO performance below industry or regional averages. Combining payment terms and early-payment discount programs can deliver the best of both worlds: more discounts and improved DPO for buyers, while suppliers improve their cash flow via early-payment discounts.
But what if you as the buyer don’t want to apply cash to discounts, and prefer to focus on extending payment terms?
That’s where supply chain finance plays a valuable role. Here, a third-party financial institution makes the early payment to a supplier in exchange for a small fee, while the buyer holds on to payment until the invoice due date. With this arrangement, buyers maintain their DPO, while suppliers have access to cash at typically lower rates than they would negotiate on their own, if they could even access a line of credit. For many small and midsize suppliers, supply chain finance can be an only financing option.
As the Strategic Treasurer report explains, the goal of any working capital management strategy should not be to increase or decrease working capital, but to optimize it. That’s where a business network can play a vital role, helping buyers and suppliers collaboratively manage their cash and working capital to meet their differing objectives.
Interested in a thorough analysis of supply chain finance trends, solutions, and best practices? Get it today by downloading this analyst report on supply chain finance solutions from Strategic Treasurer.