Suppliers generally offer a discount to customers if they are paid in a timely fashion — i.e., usually before the 30-day period after a payment is requested. Using a bit of lingo: If a supplier offers a “2 percent/10 net 30” timeframe, what that means is that they are willing to offer a customer a 2 percent discount if the customer pays the outstanding amount in full within 10 days.
Conversely, there is no discount applied if the customer pays within the normal, contracted term of 30 days (that is, after the 10-day cutoff). The advantages of such a system lie in the fact that 1) the customer gets a discount, of course, and 2) the supplier gets paid more quickly, which enables efficient cash flow management.
Nowadays, dynamic discounting can offer great flexibility to parties on both sides of the transaction, with a recent whitepaper by iPayables InvoiceWorks stating that both parties benefit from the process.
Under the terms of dynamic discounting, a customer actually initiates the terms of the discount to the supplier, and that discount can change based on when the supplier actually gets paid — and technology is employed in order to keep the process running smoothly. In the event that an invoice is approved, a supplier could, for example, get an email alert that lets them know that the customer is willing to pay as soon as tomorrow for an agreed-upon discount, say, in this case, 1.62 percent.
The discount itself is “dynamically” calculated on a daily basis, and that rate is in turn based on an annual return that is demanded by the customer. The dynamic discounts can also be calculated based on other methodologies, such as when the supplier is allowed to select a preferred payment date and in return they are able to see the discount that is tied to that date. If an invoice is not approved by that date, then the discount is recalculated based on an actual payment date.
In reference to flexibility, according to iPayables, the supplier is able to accept a discount deal when it is needed and leave it when they do not need it. The customer also is able to reap the benefits of raising or lowering the cost of capital according to their own immediate needs — say, when they are short on cash.
With a nod toward technology, iPayables notes that the paper invoicing system is a non-starter when it comes to dynamic discounting, as there is a manual “matching” process that means that invoices wend their way through a long process, and a not particularly efficient one. In fact, iPayables estimates that within larger organizations, roughly 50 percent of invoices that are shepherded through the traditional paper process are already past due upon being entered into the payables system, with “only around 35 percent” entered by day 24. Yet, the firm continues, the average approval time through a system that is automated, say, as with the InvoiceWorks system, is a scant 2.7 days. That’s because the electronic invoices are submitted instantly and matched instantly, and then the effective discount process can be put in place. And, as iPayables writes, “Offering to early pay a supplier at day three is much more interesting than offering to early pay at day 24.” Not surprisingly, research conducted by the firm shows that as the next term nears, the number of discounted invoices declines.
The implementation of a discounted system has a few variables that must be considered by a company, however. Among them are whether the payables system has the ability to store “non-standard terms” and whether dates can be changed after an invoice is created. Otherwise, a firm’s tech professionals can spend an inordinate amount of time and money on new processes.
In a case study centered on JetBlue, iPayables notes that automatic payable systems are able to offer dynamic discounting to certain suppliers and that after suppliers chose early payment options, a discount credit would be generated, with automatically applied coding and discounts reflected in the invoice itself.