According to new data from business management consulting firm PayStream Advisors, dynamic discounting, which allows corporate buyers to receive a discount on their invoices based on how early they pay, is taking off in the accounts payable (AP) realm.
Its latest report, the 2017 AP & Working Capital Report, sponsored by automated invoice processing and accounts payable solutions provider Inspyrus, finds dynamic discounting is becoming a ubiquitous part of corporate cash flow strategy, despite once being reserved for the most elite organizations.
“We are encouraged to see more organizations leverage dynamic discounting as it allows them to dramatically increase early pay discounts with a 'supplier-friendly' model,” said Inspyrus founder and CEO Nilay Banker in a statement reflecting on the report. “By giving suppliers instant visibility of in-flight invoices, and the ability to request early-pay discounts when they need cash, enterprises can expedite processing of discounted invoices and see a quantum leap in supplier participation and early-pay discounts achieved — with all savings going right to the bottom line.”
According to the report, while early payment discounts are helpful, AP departments face some barriers to actually achieving them.
Nearly half of businesses cited said lengthy approval cycles are the most common reason why they miss a discount opportunity, with 41 percent noting the issue. More than a third reported missing information on invoices, and an additional 36 percent cited lost invoices.
Further, very few suppliers are actually presenting this opportunity to their business customers, Forty-three percent of companies said less than 10 percent of their suppliers offer dynamic discounting.
Overall, only 18 percent of companies said they are “always” able to capture an early payment discount. Eighty-two percent, meanwhile, said they either sometimes or never capture these opportunities to save.
For those businesses able to capture the discount, PayStream Advisors noted they typically do so in two ways: either by leveraging a dynamic discounting management (DDM) tool or by manually paying an invoice on-time to receive that discount. Research suggests suppliers are able to offer more early payment discounts when a DDM solution is in place.
Nearly half (45 percent) of companies using a manual strategy to capture early payment discounts see between 1 and 5 percent of their suppliers offering these discounts. But, for the 29 percent of companies using a DDM tool, that percentage of suppliers offering discounts spikes to between 21 and 40 percent.
“This increase in offered discounts occurs partly because many DDM providers offer supplier onboarding services upon buyers' implementation of a solution, educating the suppliers on the benefits and uses of the program and walking them through registration," the report explained. “In addition, DDM solutions offer greater visibility into invoice approvals, [giving] suppliers more choices in how they can offer discounts [and] further increasing their willingness to participate.”
The report continued, saying, “Of course, one of the most powerful benefits of DDM platforms is their ability to save companies money, which can amount to millions of dollars each year depending on the size of the company, the number of invoices and annual spend.”
And while the commercial card remains a relatively uncommon B2B payment method in the accounts payable department, PayStream Advisors said implementation of a procurement card program can actually boost the ability to capture early payment discounts. According to the survey, 40 percent of businesses use purchasing cards to capture discounts, more than any other tool, including automated discount capture tools or supply chain finance.
This is because paying an invoice with a card means buyers take advantage of the typical 30-day payment term with the card company, enabling a supplier to get paid earlier and a buyer to access the early payment discount without having to let go of their cash right away. With this tactic, the report said, virtual account numbers or virtual cards are also gaining ground.
“For many companies, especially those with more indirect spend and high volumes of lower value invoices, the ability to improve working capital greatly depends on the efficiency of the invoice-to-payment cycle,” said Jimmy LeFever, director of research and consulting at PayStream Advisors, in another statement. “Our research shows that combining dynamic discount management and AP automation with integrated supplier engagement — such as the Inspyrus approach — enables both buyers and suppliers to aggressively unlock new, significant and inexpensive sources of cash.”