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Dynamic Discounting: AP Automation Highlights Value

by | Aug 5, 2019

Dynamic discounting is when a buyer uses the company’s cash on hand to pay supplier invoices early at a discounted rate.  Unlike early pay discounts, dynamic discounting operates on a sliding scale. Pre-negotiated rates are offered based on when payment is made. The closer payment is made to standard contract terms, the lower the discount. 

There are significant benefits for both parties. In simplest terms however, the buyer and company improve supplier relationships and the bottom line. The supplier expands access to capital at good rates without resorting to more costly options.

Dynamic discounting is enjoying a resurgence with AP automation’s ability to monitor, implement and control the process. A 2017 AP & Working Capital Report by PayStream Advisors claims adoption of the flexible practice is growing as proof of corporate spend savings grows. Thousands in savings for SMB and millions for “best in class” organizations. Move over fortune 1000’s, dynamic discounting is making a splash across the board. 

Consider transparency of in process invoices, supplier/buyer interactive portals, as well as fast supplier payment.  All powered by strong supplier onboarding programs embedded in AP Automation vendor solutions. These AP automation features are contributing to new and positive perspectives of dynamic discounting enhancing the supplier/buyer relationship. 

Here are 4 fundamental tips to add dynamic discounts to enhance the company’s bottom line –  

1. Implement AP Automation

Like all b2b payment strategies, it’s time to end the analysis paralysis that comes with the payment industry’s complexities. While it’s true there are automated AP solutions that require major capital investments, there are simpler options for quicker access to the buyer/supplier benefits of dynamic discounting.  Our solution is a perfect example.  The XBS Global CPX Solution requires no capital outlay and can be inserted into the current workplace dynamics.

Manual accounts payable processes make access to any discount program challenging.  The fact is, invoice discrepancy, long approval processes and missing paperwork are just a few of the AP issues that equate to lost discounts.  Equally concerning are trends over the last decade of delayed supplier payments in the US as outlined in a recent article in Thomas Insights.

These two facts alone demand suppliers and buyers alike consider mutually productive ways of conducting business.  AP automation is conclusively listed by experts as a must in 2018 and beyond as an indispensable b2b payment goal.

2. Collaborate with treasury, procurement and Accounts payable.

This includes your chosen AP automation vendor.  Successful dynamic discounting programs require C suite buy in and of course input from treasury! How much cash is available for program investment?  Is excess cash relative to certain times and seasons?  Planning ahead will smooth the process.

Procurement must engage.  Contracts and purchase orders need to include both standard and discount terms.

3. Negotiate standard terms with your suppliers.

30 days? 45? 60? Pushing standard terms out further than 30 days gives buyers more room to then incentivize suppliers discount terms. Today’s worthwhile AP Automation vendors typically assist their customers in AP spend analysis, identification of top suppliers and term negotiations. We do.

4. Include all suppliers in the Dynamic Discount Program!

Why not?

Of course it’s important to identify top spend suppliers for optimal savings. However your SMB vendors may be more in need of access to working capital. We never know when the small supplier is going to rise to that emergency occasion or start to fill a unique and growing niche.

Today’s small supplier could be tops tomorrow.  Ask your AP Automation vendor to assist in negotiations across the board.  Remember improved buyer/supplier relationships is a benefit of the dynamic discounting objective.

Overall, the addition of AP automation factors greatly in the success of this unique discount program.  By the same token, it brings the AP department out of strict back office function towards  a uniquely valuable company role –  generating revenues and returns and strengthening supply chain partnerships.