Early payment discounts and bottom line benefits

Customers worldwide are taking the opportunity to review existing processes and make changes that will continue to help them scale efficiently and compete effectively.

For UK businesses, a major factor in financial decisions this summer was the outcome of last May’s election. This resulted in the Conservative party taking a majority control of government, putting an end to uncertainty in the financial markets and unleashing a flurry of activity.

This is a sensible time for treasury departments and finance divisions to consider investing in the corporate’s financial supply chain. Already established as a use of funds that’s in everybody’s best interests, there are even more reasons to consider doing so.

Early payment discounting and dynamic invoicing/payments are both opportunities for saving a company large sums of money, so now it is important to explore how they can go about investing in their financial supply chain.

As interest rates remain low in much of the world – and even negative in some banks in Switzerland and Germany – there is little incentive to store money in banks. Those companies with working capital need to look for something else: a way to use their resources that benefits the business.

The answer could be to invest in their own financial processes. Can the workflow of invoices and payments be directed in a way that positive cash flow can be applied to gain a greater bottom line benefit?

The benefits of early payments

The execution, funding and timing of payments can be orchestrated to benefit the buyer in a number of ways. The discounts achievable through early payments, for example, can take advantage of working capital and the existence of low, even negative interest rates.

I see more businesses moving towards this model. Longer payment terms are often a symptom of companies guarding their capital, taking advantage of interest rates or other investments to work it in the most profitable way. But these investment options are dwindling. Early payment discounts lower operating costs, which will become the most appealing application of working capital.

Dynamic discounting is an alternative funding option that allows early payments to boost working capital. Suppliers get better control over their receivables, boost their cash flows and lower their days sales outstanding (DSO).

There are, of course, other options for investing in the financial supply chain, and companies that share their insights can also held spread the benefits. The decisions and changes companies make now will reap rewards over many months to come.

1106 views

Related reading