Making money with payments

Rapid approval of invoices is a prerequisite for applying Dynamic Discounting. "Suppose the approval process is completed within 48 hours. Then, with a 30-day payment period, the invoice will be waiting for payment for 28 days. By bringing that payment forward, it is possible to achieve a discount on the agreed price. This directly benefits the operating result, as the original price was already factored in."

For an invoice to be approved quickly, the process preceding it must be in good order, argues Tanate. This becomes possible when an organisation uses a BSM platform. Business Spend Management approaches all spending holistically: from Source-to-Pay. From finding the best suppliers to agreeing and monitoring contract terms to delivery and invoice processing. "If an invoice matches the order or ongoing contract, the approval process can be short."

Discounting. "It is an additional functionality of our BSM platform," Tanate outlines. ‘There are actually three variants. The most traditional form is that, for example, you get a 2% discount if you pay the invoice within X number of days. There are also variants where the discount is 2% if paid within day X and 1.5% if paid within day Y, and so on. Both variants are essentially static.’

In the purest form of Dynamic Discounting, the process is much more flexible. The buyer can indicate per invoice whether he wants to pay at a discount within a certain period. Then the supplier can accept that or not. This is of course impossible to do manually when you have thousands of suppliers. But with BSM software, this is very simple: the platform continuously presents the choices to parties. These can tick what they want and the system implements it. ISPnext customers, thanks to the recent acquisition of Flinqer, have access to Dynamic.

The benefits of Dynamic Discounting for the buying party are clear, according to Tanate. "For cash-rich organisations, it can be attractive to create extra margin with certainty," he says. As an example, he gives an energy company that pays €50m in invoices annually, including to self-employed people. "Precisely a target group that needs timely payment. And just calculate what 1.5% discount for early payments yields."

He adds that timely payment also contributes to the financial health of the supplier chain. "It improves the relationship with your supplier."

The benefits for that supplier include increasing its working capital and access to low-cost funding. "It is a cheaper alternative than the bank. Financing is getting more and more expensive; you quickly get to 4% or 5% interest. So the urgency is increasing. It may be your own money, but you make it available earlier this way."

Timely payments make cash flow more predictable. "Moreover, it is a voluntary choice: as a supplier, you can indicate per invoice whether or not you discount prompt payment."

In Tanate's view, Dynamic Discounting is particularly relevant for the 80% of suppliers an organisation only spends 20% of its expenditure on. "With those top 20 where exactly 80% of spending goes, you often already have tight agreements. The landlord of your building or the lease company is not keen on this. No, the potential is in the tail of the remaining 80% suppliers."

Dynamic Discounting is an interplay of Procurement and Finance, Tanate believes. "At its core, it is a Finance-opportunity. But it is Procurement that facilitates it. It is up to Procurement to make clear agreements with suppliers that enable Finance to take advantage of the payment process."

In his view, it is a logical consequence of Business Spend Management. "It is the ultimate result of fully controlling expenditure, a reward for efficiency in the process before it. So if you get that right, you can make money by paying invoices."