This is something that was made very clear in Ardent Partners’ recent study (ePayables 2012: The State of the AP Market). As a function, AP can add a whole lot more value than data entry and responding to supplier inquires. There is an opportunity for AP to work closely with treasury and finance to develop (and execute) more sophisticated cash management strategies that include better processes, improved payment strategies and greater overall visibility. All of which can be of immense value to the enterprise and help to optimize working capital.
As AP groups begin automating their processes and gaining (and sharing) real-time access to invoice and payment data, they are in a better position to influence and support the cash management strategies that treasury and finance wish to implement. In manual environments, the inefficiency and lack of visibility make it all but impossible to leverage any of the valuable data that lies within AP. Data that can be utilized to support financing programs such as supply chain financing as well as activities that can have a more immediate impact such as capturing early payment discounts. In fact, according to the Ardent Partners study, for 62% of organizations capturing early payment discounts has become moderately or significantly more important over the last two years.
The role of supply chain finance is to optimize the availability and cost of financing the transactions between buyers and suppliers. Facilitating this within a network of buyers and suppliers as well as banking institutions enables trading partners to gain access to lower-cost, short-term capital to optimize their cash flow. For instance, if a supplier offers an early payment discount to its customer, the buyer may choose to borrow the payment amount from a bank at a low cost and use those funds to make the early payment and receive the discount. In this scenario, the supplier gets its cash early and the buyer optimizes its working capital if the benefit from the early pay discount outweighs the cost of the short-term loan from the bank.
One technology that allows organizations to capture these discounts in a more programmatic and controlled manner is Dynamic Discounting, a tool that allows buyers and suppliers to dynamically offer and accept new payment terms to take advantage of early payment discounts. Dynamic Discounting solutions can benefit both buyers and suppliers since buyers can reduce their costs and get a much higher return on their cash and suppliers can get paid quicker. The ability to capture more early payment discounts offers organizations a tremendous potential return on their cash, for example, the return to a buyer who pays an invoice with a “two-10 net 30” term (the buyer subtracts 2% from the invoice total if it is paid within 10 days) on the 10th day is more than 36% annualized. On the other hand, suppliers benefit by getting paid quicker and by having more visibility into and control over their receivables. As mentioned in the study, the usage of dynamic discounting over the next year is expected to grow with 26% of AP groups looking to start utilizing Dynamic Discounting.
For AP groups looking to get started, there are some providers like Ariba & ADP who offer fairly sophisticated dynamic discounting capabilities among other features that span the P2P spectrum. Having tighter linkage and automation throughout the P2P process can result not only in significant savings but a level of visibility and control that can be incredibly valuable to the entire enterprise.
In fact, last month, I co-presented a webinar with Drew Hofler, Sr. Solutions Marketing Manager of Working Capital & Payment at Ariba and we discussed how AP is well positioned to uncover low risk, high yield opportunities and collaborate with Treasury to execute on them (the recorded webinar can be accessed here). Alternatively then there are the providers like Taulia who specialize in dynamic discounting solutions and are focused on the SAP user base, offering a highly integrated solution.
What is important is that AP leaders start thinking/doing/considering how to get started in this high-value activity.
I agree dynamic discounting has become more important today especially in the economy that we are living in. It will definitively help an organization improve their ROI.
James – Great point! I couldn’t agree more. Driving process efficiencies is important. But impacting cash positions is strategic and can capture the attention of treasury and finance executives.
As the title of this article suggests, AP can and should be more strategic. Having 26% of all AP groups looking at this strategy is a start. As more groups understand the returns, I’ll be interested to see how fast that number rises in Vishal’s 2013 report.
Stay tuned….
I couldn’t agree more that AP has a tremendous opportunity to play a more strategic role in most corporations and add real value to the bottom line. Improving process efficiencies will help lower cost. Better cash management will also help drive savings. While I agree with the virtues of Dynamic Discounting, a case can be made that better upfront or proactive management of payment terms with suppliers can eliminate much of the need for dynamic discounting after a good has been purchased. If terms and conditions are negotiated upfront before goods are purchased, discount terms can be automatically built into your AP automation solution and the need for dynamic discounting is mitigated. By managing discounts up front before purchases are made, you can look at your total potential purchases with a supplier and negotiate discount terms based on the projected sum of your purchases with that supplier rather than leveraging dynamic discounting for individual purchases after the fact. Chances are you will be able to negotiate better terms and conditions with a supplier and that will help benefit your organization even more, plus, if all of the discounts are built into your AP automation solution, AP staff will be freed up to look for other areas where they can drive process improvements and save the company even more.