Managing Cash in a Networked Economy

How to combine payment term standardization with an early-payment discount program to manage cash better.

As more and more trading partners leverage business networks to manage invoices and payments, a term has emerged to describe the phenomenon: “the networked economy.” In most cases, discussions about the networked economy have involved movers and shakers in procurement and finance. In too many companies, the conversation has left out an important stakeholder: the treasurer.

Why should a corporate treasurer be interested in an e-commerce initiative? That could be a $100 million question. Treasury policies focused on static discounts and maximizing float can undermine business performance. Savvy treasurers who can translate today’s collaborative procure-to-pay approaches into better cash and working capital management have the opportunity to drive new strategies that increase profitability and cash returns.

Still, about two-thirds of a company’s total spend, on average, should be ripe for a program that involves some combination of terms extension and early-payment discounts. How an organization decides to match payment term offers to different suppliers will depend on several variables, including commodity category, vendor size, potential risk to the business, ease of collaboration, whether it is a mission-critical partner, and cash-flow demands. Reliable transaction data from a business network can prove to be a great asset in this analysis.

 

Businesses that combine dynamic discounting with electronic invoicing usually get up and running with an early-payment discount program before the e-invoicing or dynamic-discount solution is in place. This “rapid ramp” approach targets suppliers that either have offered discounts in the past or have never been approached with the idea of early-payment discounting. For suppliers that agree to participate, the buyer initially assigns a mutually agreed-upon standard payment term and captures the discounts manually. Once the e-invoicing and dynamic discounting software are in place, those solutions handle the discounts automatically, and they can expand to include the sliding-scale discounts. One oil and gas company that followed this approach identified nearly $1 million in savings through early-payment discounts in three weeks.

For many suppliers considering p-card payments, dynamic discounts may be a better option. Their flexibility is a major advantage. P-card merchants have fixed fees, and suppliers have no leverage to negotiate the rates. They can, however, counter a buyer’s discount offers as part of a negotiation over accelerated payment. Plus, the cost to accelerate payments is well below p-card rates.

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