Dynamic Discounting and the Time Value of Money
In a recent article by CPO Rising, the difference between early payment discounts and the ‘Time Value of Money’ was discussed. So, what do they have in common? Well, for starters, they’re both integral parts of accounts payable automation. What is the TVM? It’s the concept that a single dollar received today is worth more than a future dollar.
Finance of Today
This is the foundation of finance today. It’s also the reason why both Electronic Invoicing and dynamic discounting make perfect sense on both sides of a trade. And, what it means is that any funds that are available in the present are worth more than the same sum of money in the future. Why? To begin with, for the money’s potential for earning interest. On the other hand, those funds could also be used for reinvestment, expansion, or growth of a business. It’s basically the same theory as ‘a bird in the hand is worth two in the bush.
Making the Most of the TVM
How can you make the most of the Time Value of Money every day in your AP department? Well, look at it this way. When you use dynamic discounting (aka supplier discounts or early payment discounts), you’re seeing a major reduction in the amount that you’re paying your suppliers for their goods and services. Sure, this type of discounting is nothing new and has been around, well, practically forever. Dynamic discounting was once a common practice, all but disappearing during the time of the industrial revolution because companies became so big that everything became impersonal. Fortunately, in recent years, those discounts have made a comeback in a big way.
Eliminating Paper and Lost Time
The sooner money is received, the more it’s worth. So, what can you do as a business owner or operator to ensure your accounting department is up-to-speed in their efforts to take advantage of the TVM? You can start by eliminating the reliance on paper checks and invoices, as well as on all forms of manual processing, which causes approval times that are way too slow. In addition, manual processing offers very little visibility when it comes to outstanding invoices. This makes it hard for your AP department to take advantage of any dynamic discounting opportunities on top of the risk for potential late payment charges. Without AP Automation and Dynamic Discounting, all you have is an accounts payable department that’s behind-the-times while costing you way too much time and money.
Cohen,B (2018, October 19). Payables Place First Thing: Early Payment Discounts and the Time Value of Money. Retrieved from http://www.cporising.com