All over the world, suppliers complain about the same problem—it’s not that they don’t have buyers; it’s not that their buyers don’t pay them; it’s not even that their buyers don’t pay them on time. The problem is that what constitutes “on-time” in the business to business payments arena can still often mean waiting as long as three months before receiving payment on an invoice. With gaps so long between provision of goods and services, payment cash-flow problems become a matter of course for those businesses sitting on the supplier side of the equation.
At worst, this deals a fatal blow to companies—particularly to start-ups for whom cash flow is vital to keeping the doors open and the lights on. However, even among companies that have other means to manage cash flow, long waiting periods mean incurring difficult costs.
Those costs can come in the form of dilution of equity, as firms turn to fundraising rounds. Those costs can come in the form of debt as companies borrow against their receivables—often at extraordinary interest rates. Those costs can come in the form of opportunity – companies that are either unwilling or unable to buttress cash flow with venture funding or borrowing, simply can’t hire, develop or expand as quickly as they might with more cash at their disposal. Whatever their form, costs will come, and with them strain in the relationship between suppliers and buyers.
Recently the issue has spilled into national consciousness as President Obama – to great fanfare – has announced the Supplier Pay initiative, a program that calls upon private sector to ramp up the rates at which suppliers are paid.
The program has received a boost from early blue-chip adopters such as Coca-Cola and IBM, and is a strong first step, according to Ariba’s Director of Solutions Marketing Drew Hofler—but one that needs to be viewed in the larger context of issues in B2B billing.
Hofler talked to PYMNTS, with MediaFly CFO Johnathan Evarts, about the issues that companies face, and some of the more concrete steps being taken in the private sector to deliver on the Supplier Pay initiatives lofty goal of near universal invoice settlement between buyers and suppliers within 15 days.
Dynamic discounting, the process by which buyers and suppliers can negotiate discounting terms for early payments, is made possible by Ariba because its network specializes in connecting the two groups two each other.
(Dynamic Discounting Part 1) “Dynamic discounting really starts with a network environment where buyers and suppliers can connect with each other over the business process of invoice receipts and approval. So the invoice is able to come in electronically, be cleaned up automatically so all the exceptions are removed and what that means is that the invoice can be approved to pay, to go through the process on the accounts payable side, in a very rapid period of time. Now what you have is an approved invoice that been approved in a day or two, that is up on this network’s collaborative platform that allows both the buying and supplying organization to see that there is an opportunity to get paid.”
From there, the buyer can propose a discounted rate at which they will pay off the invoice immediately. On the Ariba network, Hofler explains, the supplier than has the option to accept, make a counter-proposal or reject the offer depending on their needs.
And, the ability to suit their needs to the situation is the facet of dynamic discounting that their client most appreciates.
MediaFly is one such client, and to CFO Jonathan Evarts, the ability to take advantage of dynamic discounting was MediaFly’s cash flow solution—particularly in 2011 when it was in the midst of a major expansion push.
MediaFly was then working on completing mobile encryption capability that it needed in both its prime market sector—in media and entertainment—and in the vertical it eventually expanded into – financial services.
(Dynamic Discounting Part 2)“What dynamic discounting allowed us to do was in a couple of clicks get access to funds earlier than procured payment terms, really allowing us to hire faster than we would have otherwise. And typically these very large companies, we’re looking at payment terms of net 45, net 60, net 90 and instead of that simply monetizing to their current cash on hand that they would be paying out regardless and giving us access to that capital in exchange for a discount. What we were able to do with that was build a kind of unique mobile encryption capability which allowed us to close our media and entertainment customer which then turned into additional revenue because we took that same capability, that same innovation, and leveraged it into a new customer in the financial services industry. ”
MediaFly made heaviest use of the service between 2011 and 2012, and while it does occasionally still offer it—in the years since its business has expanded and its cash flow has stabilized, it has had less need to be quite so flexible in its billing.
However, both Hofler and Evarts pointed out that while start-ups for which cash on hand is their essential life blood, the ability to offer discounted billing is actually good for a variety of businesses at numerous stages of development.
As an example, Hofler that the largest discount ever made on the networks was for around $600K, and it was made by a high recognizable Fortune 500 company that was extremely well capitalized and likely unconcerned with its cash on hand.
The balance sheet at the end of a quarter, that is a different issue—and for some large companies facing earnings calls with investors, taking a receivable off the balance sheet is worth the discount.
(Dynamic Discounting Part 3)“If the concern is balance sheet,” noted Evart, “ then you’d be willing to make the exchange on the supply side. In other words, from the seller’s side, if I am less worried about P&L I am willing to take a discount, essentially finance that deal and take less revenue, in order to get access to capital, in order to bolster my balance sheet. So whenever you are in an arbitrage situation where you need assistance on a balance sheet, dynamic discounting does a great job of providing an alternative for that. That’s true whether you’re a small company looking for cash, whether you’re trying to monetize a receivable on your balance sheet at a billion dollar corporation.”
Both men noted that the Supplier Pay initiative is a lofty goal, but to make it work, there have to be structures in place so that both buyers and suppliers have an incentive to move the process along more quickly.
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