Companies continually strive to improve working capital and increase free cash flow but are often met with conditions that disrupt their supply chain. Bank regulatory requirements and rising interest rates prevent suppliers’ ability to borrow money to pay for inventory costs, and market uncertainty enhances the risks that supply chains face, like unpredictable supply and demand conditions, currency volatility, and negative liquidity positions.
Dynamic Discounting can be the solution to reduce supply chain risk while also optimizing working capital.
Early payment discounting is a topic already known to trade finance, but technologies like cloud-based software platforms, the power of connectivity-as-a-service, and enhanced data analytics have made an early payment financing technique more flexible and appealing. Enhanced flexibility and visibility from cloud-based treasury technologies can turn early payment plans into Dynamic Discounting, which allows suppliers to get paid at any time between an approved invoice and an agreed payment term.
Dynamic discounting takes a different approach to strengthening financial statements than the Supply Chain Finance strategy. Supply Chain finance models use bank funded solutions that offer to pay suppliers earlier, while Dynamic Discounting is financed by the buyer rather than a third-party finance provider. Dynamic discounting also takes a different approach to standard discount programs like the 2/10 net 30 approach.
What is Dynamic Discounting?
Companies are always under pressure to reduce costs and oftentimes are also met with excess cash on balance sheets. Dynamic Discounting is a way to address both situations in a way that reduces costs while also optimizing working capital.
With Dynamic Discounting, buyers have the opportunity to pay suppliers early. This early payment is made in exchange for a reduced price on the goods or services purchased.
Dynamic Discounting looks to reduce cost of goods sold (COGS) to increase profitability and provide an opportunity to earn returns greater than interest income on excess cash. If you’re looking to yield a higher return on liquidity, Dynamic Discounting is a strategic way to put excess cash to use.
Dynamic Discounting Benefits
This trade financing approach creates a mutually beneficial relationship for the supplier and the buyer.
For buyers, it creates appealing risk-free returns on available liquidity. The cash that is invested with suppliers captures discounts, which are risk-free returns more valuable than the returns offered by a traditional investment. It also addresses the need to decrease costs by reducing COGS with discounts.
Not only this, but it also creates a more stable supply chain and strengthens supplier relationships.
For suppliers, the benefits of Dynamic Discounting relate directly to cash flow. Earlier payments mean an improved liquidity position, creating an opportunity for suppliers to pay their own suppliers earlier. They could also look to invest more money into their own business or increase business with their buyers.
This financing strategy also improves cash forecasting for suppliers. Forecasting future cash flows and planning ahead can be more feasible for suppliers that decide when they will get paid.
How Does Dynamic Discounting Work?
Successfully adopting a Dynamic Discounting strategy is not as simple as just paying invoices earlier. It requires flexibility around how and when suppliers are paid. Payments that are made before due dates should be evaluated for discounts based on a calculated sliding scale. Ultimately, an earlier payment means a greater discount.
Cloud Treasury solutions like Kyriba can help companies transition to a Dynamic Discounting approach to optimize working capital. Kyriba’s Dynamic Discounting approach lets you employ idle cash to earn risk-free double-digit rates of returns by making early payments to suppliers.
Instead of a traditional fixed remittance value, you can offer early payment on invoices in return for discounts. The discounts are based on parameters such as supplier profile, the invoice’s value, and days outstanding, ensuring a wider discount window in comparison to standard discount programs like 2/10 net 30 approach.
Kyriba’s Dynamic Discounting workflow is designed with the supplier in mind.
First, approved invoices are uploaded from the buyer’s ERP. The supplier will then select the invoices that they would like to be paid early. Next, Kyriba Dynamic Discounting calculates the necessary payment based on agreed terms. This is then integrated with the ERP to support the updated workflow.
Along with using Kyriba’s Dynamic Discounting Finance Solution, users will be able to evaluate the complete workflow with a comprehensive financial platform. Cash visibility, forecasting, payments, and pre-built ERP integrations are a few of the capabilities that will help to improve financial performance.
Elire’s consulting team comprised of seasoned banking and corporate treasury experts utilize the capabilities of Kyriba Services to offer clients an unparalleled treasury system. Set up a meeting with the experts by contacting [email protected]. Learn more about other innovative solutions on Elire’s Emerging Technology and Treasury & Finance Blogs.