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| '''Dynamic Discounting''' describes an arrangement between a buyer and supplier whereby payment for goods or services is made early in return for a reduced price or discount. The arrangement includes the ability to vary the discount according to the date of early payment. The earlier the payment, the greater the discount. Through dynamic discounting, large organizations can reduce their total spend by automating and maximizing supplier discounts, while suppliers get paid earlier at a lower cost of capital than alternative options. |
'''Dynamic Discounting''' describes an arrangement between a buyer and supplier whereby payment for goods or services is made early in return for a reduced price or discount. The arrangement includes the ability to vary the discount according to the date of early payment. The earlier the payment, the greater the discount. Through dynamic discounting, large organizations can reduce their total spend by automating and maximizing supplier discounts, while suppliers get paid earlier at a lower cost of capital than alternative options. | ||
| == How does Dynamic Discounting Work? == | == How does Dynamic Discounting Work? == | ||
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| An example of why dynamic discounting is beneficial to buyers is as follows. If a buyer receives a 2% discount for early payment of an invoice – for example paying a 30 day-net invoice after 10 days. Therefore, instead of earning interest on the cash held in an account, it is “invested” for 20 days to get a 2% return, This represents the equivalent of a over 36% annual return on capital. While the early payment of the invoice would lead to a reduction in interest on the cash, the return for early payment far outweighs the loss of interest. That early payment may also be be very valuable to the supplier who values cash flow more than high margins. | An example of why dynamic discounting is beneficial to buyers is as follows. If a buyer receives a 2% discount for early payment of an invoice – for example paying a 30 day-net invoice after 10 days. Therefore, instead of earning interest on the cash held in an account, it is “invested” for 20 days to get a 2% return, This represents the equivalent of a over 36% annual return on capital. While the early payment of the invoice would lead to a reduction in interest on the cash, the return for early payment far outweighs the loss of interest. That early payment may also be be very valuable to the supplier who values cash flow more than high margins. | ||
| For many suppliers credit is difficult and / or expensive to secure. By working closely with customers and leveraging the power and flexibility of a P2P system, they can create a genuine synergy that reduces prices, reduces the cost of borrowing and ultimately – reduces the cost of doing business. |
For many suppliers credit is difficult and / or expensive to secure. By working closely with customers and leveraging the power and flexibility of a P2P system, they can create a genuine synergy that reduces prices, reduces the cost of borrowing and ultimately – reduces the cost of doing business. | ||
| Examples of companies that offer dynamic discounting software platforms include: ; ; ; ; and . | |||
| In the case of , the dynamic discounting is a marketplace that offers a true dynamic (real-time) discounting mechanism, allowing buyers to realize income opportunities beyond the scope of "sliding scale" norms. For suppliers, this provides a better working capital option compared to tight credit markets, bank lending and interchange fees, allows them to optimize financial metrics including liquidity and reduction of DSO (]). | |||
| Kyriba's dynamic discounting solution is integrated with its broader treasury management system (TMS), so companies can identify excess cash and liquidity in the TMS and apply that to their discounting program. Kyriba also provides electronic payments straight through processing so the payment (and integration with the ERP) is managed as well. | |||
| ==Features== | ==Features== | ||
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| ==Benefits== | ==Benefits== | ||
| Dynamic discounting offers suppliers the flexibility of discounting some or all of their receivables, eliminating the need to use high-cost financing options like factoring or ] to obtain cash liquidity and stronger balance sheet positions. It also mitigates the uncertainty surrounding the timing and amount of payments, allowing for superior ] capabilities. On the other hand, supplier financing can enable buyers to extend their payment terms with the injection of third party capital. These benefits accrue without adversely affecting trading partner relations. And interestingly, dynamic discounting is based on a buyer’s credit rating instead of being pegged to the supplier’s risk, further strengthening buyer-supplier relationships. | |||
| *Allows buyers to pay their suppliers early in exchange for a discount | *Allows buyers to pay their suppliers early in exchange for a discount | ||
| *Allows buyers to benefit from double-digit, risk-free returns | *Allows buyers to benefit from double-digit, risk-free returns | ||
| *Reduces large organizations annual spend by earning significantly more early payment discounts through additional discounts on non-discount invoices and maximum capture of traditional discounts | *Reduces large organizations annual spend by earning significantly more early payment discounts through additional discounts on non-discount invoices and maximum capture of traditional discounts | ||
| *Strengthens the financial supply chain and supplier relationships by providing suppliers with quick, easy access to cash |
*Strengthens the financial supply chain and supplier relationships by providing suppliers with quick, easy access to cash. | ||
| == References == | == References == | ||
| {{Reflist}} | {{Reflist}} | ||
| *http://www.ariba.com/solutions/manage-cash/discount-management | |||
| *http://www.c2fo.com | |||
| *http://www.kyriba.com/solutions/supply-chain-finance | |||
| *http://www.ob10.com/uk/en/services/accounts-payable/express-payments/ | |||
| *http://purchasinginsight.com | |||
| *http://www.taulia.com/en/ | |||
| ] | ] | ||
Revision as of 14:25, 17 July 2013
Dynamic Discounting describes an arrangement between a buyer and supplier whereby payment for goods or services is made early in return for a reduced price or discount. The arrangement includes the ability to vary the discount according to the date of early payment. The earlier the payment, the greater the discount. Through dynamic discounting, large organizations can reduce their total spend by automating and maximizing supplier discounts, while suppliers get paid earlier at a lower cost of capital than alternative options.
How does Dynamic Discounting Work?
The buying organization offers to pay their suppliers early in exchange for a discount. The earlier the payment, the greater the discount.
Historically, it’s not always been easy to achieve arrangements that work for both supplier and buyer and because of practical problems, it hasn’t always been easy for buyers to actually pay early. But with the increased use of Purchase to Pay (P2P) technologies and methods there is now no reason why a buyer cannot pay promptly depending on how the collaborative arrangements with the supplier have been agreed.
An example of why dynamic discounting is beneficial to buyers is as follows. If a buyer receives a 2% discount for early payment of an invoice – for example paying a 30 day-net invoice after 10 days. Therefore, instead of earning interest on the cash held in an account, it is “invested” for 20 days to get a 2% return, This represents the equivalent of a over 36% annual return on capital. While the early payment of the invoice would lead to a reduction in interest on the cash, the return for early payment far outweighs the loss of interest. That early payment may also be be very valuable to the supplier who values cash flow more than high margins.
For many suppliers credit is difficult and / or expensive to secure. By working closely with customers and leveraging the power and flexibility of a P2P system, they can create a genuine synergy that reduces prices, reduces the cost of borrowing and ultimately – reduces the cost of doing business.
Features
- Discount amount is calculated dynamically based on the number of days remaining until the due date
- Discounts do not need to be negotiated in advance, rather the buyer can set a liquidity limit and interest rates and allow the supplier to dynamically take discounts as working capital needs dictate
- Trading parties can tap into a risk-free, alternative source of working capital with the use of third party creditors whom pay early on behalf of the buyer
- With companies such as Taulia, dynamic discounting is available on 100 percent of invoice spend, regardless of submission type
Benefits
Dynamic discounting offers suppliers the flexibility of discounting some or all of their receivables, eliminating the need to use high-cost financing options like factoring or asset-based lending to obtain cash liquidity and stronger balance sheet positions. It also mitigates the uncertainty surrounding the timing and amount of payments, allowing for superior cash flow forecasting capabilities. On the other hand, supplier financing can enable buyers to extend their payment terms with the injection of third party capital. These benefits accrue without adversely affecting trading partner relations. And interestingly, dynamic discounting is based on a buyer’s credit rating instead of being pegged to the supplier’s risk, further strengthening buyer-supplier relationships.
- Allows buyers to pay their suppliers early in exchange for a discount
- Allows buyers to benefit from double-digit, risk-free returns
- Reduces large organizations annual spend by earning significantly more early payment discounts through additional discounts on non-discount invoices and maximum capture of traditional discounts
- Strengthens the financial supply chain and supplier relationships by providing suppliers with quick, easy access to cash.