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Dynamic discounting a win-win opportunity

Matthew Garrow-Fisher | News | 24 February 2012

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As a large shared services organisation you may be sitting on a lot of surplus cash that you're generating little interest on. After all, interest rates have been at a historic low for almost two years. At the same time your suppliers may be struggling. The global recession hit the balance sheets of small and medium-sized firms hard and with banks still reluctant to lend getting access to cash is difficult for many of them.

Dynamic discounting represents an opportunity for both parties to resolve these problems. For buyers, it allows them to generate higher returns than they could on their cash reserves, while for suppliers receiving the money they are owed as quickly as possible is an attractive proposition.

A poll of corporate treasurers conducted during the latest sharedserviceslink.com webinar - how to utilise SAP to create value in these turbulent economic times - revealed that no organisations are generating more than four per cent returns on their cash and short term investments, while 32% are generating less than one per cent.

With this in mind, it is hardly surprising that 72% said generating higher returns on cash through methods such as dynamic discounting was an appealing use of excess liquidity - substantially more so than paying down debts, boosting dividends to shareholders and getting involved in mergers and acquisitions.

Bertram Mayer, chief executive of SaaS solutions provider Taulia, was the guest speaker for the webinar, and he explained why dynamic discounting is such a financially rewarding opportunity for both shared services organisations and their suppliers.

He noted that while factoring, whereby outstanding invoices are sold to a third party financial company, is one way for smaller companies to obtain cash, the costs can be very high - in excess of 20% per year in some cases. Credit cards can also be expensive, while bank debt is difficult to acquire.

Dynamic discounting can be a viable alternative, and it differs from traditional discounting in that concessions are offered on a sliding scale. For suppliers, this removes some of the uncertainty surrounding the timing and amount of payments, and for buyers it means that discounts do not need to be agreed in advance, as they can take discounts dynamically depending on their working capital needs.

"Dynamic discounting helps you tap into the opportunity that exists between invoice approval and the average payment terms," said Mr Mayer, noting that the time it takes to approve invoices is typically around 15 days, while payment terms are around 60 days on average.

Of course the adoption of electronic invoicing is driving down the former, giving large buyers who use dynamic discounting an even greater window of opportunity to exploit concessions, and potentially speeding up the time it takes for suppliers to get their money.

For a large organisation, having approved invoices sitting idle until due surely makes no sense if they could obtain a discount on the goods or services they've ordered by paying early, especially when the returns on offer for cash reserves fall well below the discount rates being put forward by their supplier?

At the same time, suppliers may be paying interest of 18% APR to borrow money from banks, if they are able to obtain the finance at all. These cost-of-capital differences create a "multi-million win-win opportunity" according to Mr Mayer and one that growing numbers of businesses will be looking to take advantage of amid the ongoing economic uncertainty.