Can Dynamic Discounting Improve Cash Flow?
If you’re one of many business owners today who may not know exactly what dynamic discounting is and how it works in communion with accounts payable automation and electronic invoicing, here are a few facts. In a nutshell, it’s a very effective method that many businesses use for getting their suppliers paid early in return for accepting a discounted rate. After all, who doesn’t love a discount?
Generally, one business (supplier) will offer another (customer) a specific percentage off of their invoice for paying prior to the due date. So, when a supplier is offering a customer 2%/10 net 30 for example, then they’re offering to take two percent off of the invoice if the customer pays in full within ten days rather than waiting the full 30 days. On the other hand, customers don’t receive any discount at all should they decide to wait until after the ten days to pay. They may still be paying on-time, but during the 11 to 30 days time period. Now, the advantages of dynamic discounting are fairly obvious. Customers pay less and suppliers receive payment quicker, enabling better cash flow.
A JetBlue case study shows how the iPayables solution helps offer dynamic discounting to specific suppliers. When their suppliers make the decision in favor of choosing the early payment option, the system generates a discount credit that is automatically applied via their special coding and the discount is reflected in the actual invoice.
Dynamic Discounting will only work, however, when it is implemented in a system that also employs e-invoicing and AP automation since there’s obviously no way for it to work with a paper invoice process. It would require manually routing invoices to be signed, as well as manually matching the purchase orders. There would be way too much time-intensive work involved that would change it from cost-effective to completely cost-prohibitive.
According to the previous case study, by the time paper invoices have been entered into a company’s payables system, approximately 50 percent of them are already past due. Only 35 percent will have been entered by the 24th day. But with AP automation solutions the time for invoice approval time can be cut down to only a few days. In fact, the average iPayables/InvoiceWorks approval time is 2.7 days.
So, think about it. If you’re a supplier, how much more could you do to manage and grow your business if you received invoice payments within 10 days rather than 30? Would it be worth a discount to do so? Probably so. Cash flow is the name of the game and improving it, as you know, is always to your advantage. And, if you’re a customer, you might want to recommend dynamic discounting to your suppliers so that you can save that extra money every month for growing your business as well. In today’s business climate, dynamic discounting offers both parties greater flexibility. It’s a total win-win on both sides and, let’s face it, what more could you ask for?