This past week at IQPC’s Shared Services for Finance and Accounting Conference in Dallas, Direct Commerce’s Vice President of Operations, Leela Gill, and the Accounts Payable Director from Memorial Hermann Health Systems, Donald Sands conducted an insightful “fireside chat” on the benefits, challenges and best practices of Dynamic Discounting. Before we dive into the best practices and how to create value using the day-to-day cash from a business’s trading operations, let’s cover the basics of optimizing supplier discounts.
What is Supply Chain Finance and Dynamic Discounting?
Discounting Management is an automation solution that creates a win-win environment for buyers and suppliers alike-- your company saves money and your suppliers get paid earlier! In general, there are 3 types of early payment programs available in the discounting marketplace:
- Supply Chain Financing: Using a bank’s cash to pay suppliers early
- Dynamic Discounting: Using your own cash to pay suppliers early
- Buyer Initiated Payment Cards: Using a credit card to pay suppliers early
When using a Supply Chain Finance Discounting Program, the buyer signs a deal with a bank and the suppliers have a direct relationship with that bank, instead of the buyer. The bank provides the money to pay suppliers with a set of terms for early payment. With Buyer Initiated Payment Cards, the buyer partners with a credit card company, such as MasterCard, Visa or American Express, to offer Supply Chain Finance and the credit card company provides the capital to pay the approved invoices earlier with discount terms based on the buyer’s credit.
Dynamic Discounting is the most popular of these three discounting programs because it provides the most adaptability for suppliers. A company like Direct Commerce offers Dynamic Discounting as a solution and through this tool, buyers use their own cash to pay the approved invoices earlier, without any involvement from a bank or credit card company. Suppliers can receive early payments on any approved invoice up to the net date with a fixed APR. The discounts are calculated on a sliding scale and adjust based on the number of days early the invoice is paid.
What are best practices for Dynamic Discounting?
There are 4 key elements of a successful Dynamic Discounting Solution: negotiating discounts, flexible tools for suppliers, embedding Dynamic Discounting into your company’ culture and monitoring program success. A key step to implementing a discount program is to encourage suppliers to participate. In order to maximize discounts, Direct Commerce conducts calls and interviews with your suppliers to encourage them to change their default terms and get an understanding of their current terms and process. We, then, offer automation tools to incentivize suppliers to submit their invoices electronically to capture the early payments. After suppliers have begun the discounting process, Direct Commerce’s flexible tool allows your suppliers to adapt their terms based on when they want to receive their payment, the size of the discount they are willing to offer, and which invoices they want to discount. As the discounting program progresses, reporting is crucial to tracking your success. Because your invoices are automated and being processed through our program, detailed reports help to monitor, analyze and manage early-payment discounts and establish future plans to maximize your returns.