In a recent PayStream analyst briefing with Frank Davis, Managing Director of Sales & Marketing for PurchasingNet, Frank identified the greatest challenge he’s facing in marketing the new dynamic discounting module, Early Payment Discount Management, for PNet: Poor Cash Flow.
Here’s what we uncovered:
Despite the promise that dynamic early-pay discounts hold for dramatic improvements in Supply Chain Finance management , the reality is that many companies struggle to pay their suppliers on-time. Indeed, the idea of moving a payment “forward,” whether in an automated on-line environment such as PNet’s Invoice Management solution, or any AP Automation solution, is not attractive for all buyers.
In our opinion, we don’t think there will be enough demand from corporates to trigger a wide-scale shift in corporate culture until we see more banks and finance companies start to advance funds on behalf of their corporate payers, much the way they do for corporate Purchasing Card purchases. In fact, the sort of adoption rates that will make large-scale adoption of dynamic payables a “best-practice†amongst the mainstream of companies is dependent on the development of the credit conduits to make this possible — likely three or more years off.
Regardless, listening to Mr. Davis and his associate Erinn Tarpey, Marketing Manager of PurchasingNet, two things become quite clear: First, they are passionate about their new PNet features and approach it intelligently and with a sound business strategy — supporting the evolution of thier customers. Second, that they see this sort of dynamic payables relationship along the supply chain as the future of supplier-to-business transactions. And they represent a company that has built the tools to accomplish it over the past 27 years. PNet really knows where this market is headed and is trying to shape the future. PNet has a very impressive team.
Henry Ijams, managing director at PayStream Advisors, recently posted this article on dynamic discounting, in which he states that the greatest benefit dynamic discounting provides is that it,
Offers suppliers the flexibility of discounting some or all of their receivables, eliminating the need to utilize 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.
Theoretically, dynamic discounting is a simple and obvious idea: That a supplier can allow its buyers to, in the event of various cash-flow and liquidity needs, elect to change payment timing “dynamically” without negotiation. A predefined algorithm calculates a discount on the supplier’s end as a “fee” for moving the original payment date forward, based on the difference in days from the original date to the new date.
The problem is that buyers and suppliers need new collaborative tools like PNet to make the process efficient and entirely software driven. The lynch-pin of dynamic discounting is that there are no negotiations on a new price, rather a flexible arrangement which allows for a supplier to be paid early based on their current needs.
Mr. Davis and Mss. Tarpey are certainly convinced that they are moving in that direction with their dynamic payables module for PNet, developed in-house in coordination with Liz Claiborne, a client. The module provides a multitude of tools for a supplier’s business partners, including a fully functional web-based environment. We were very impressed with PNet’s vision and aggressiveness in getting deeper into the business of AP Automation.
For further information, click here for the ePayables solution by PurchasingNet.
See also: Dynamic Payables Discounting Webinar Slides.
Keith Gilroy notes:
I understand that discounts are favorable and that a lot are being lost due to inneficiencies in the buyer’s A/P and approval processes. That said, I think discounts will be dissappearing over time as more efficient and cheaper options become available to suppliers.
The goal of SCF is to provide the cheapest form of capital given the underlying trade (buyer/supplier/negotiated term) as is possible; while automating the payment and settlement process (elimination of all forms of payment except ACH); providing visibility into invoices approved for payment; and eliminating the need for collections efforts and costs of those efforts for suppliers, in turn greatly reducing the buyer’s A/P costs/resources for fielding collections calls and resolving those issues and paying late fees (or at least being invoiced for them).
So, if a supplier can pay 0.50% “discount” and receive money 48 hours from invoice approval, then why would they ever offer a sliding scale that begins on day 10 at 2.00% and goes to day 29 only to reach the same 0.50% an SCF program offers immediately? Also, where does the 2.00% number come from? It is artificial vs. a credit-determined rate in an SCF model.
Costs will be reduced to very close to the buyer’s short term cost of debt, which will make investing their cash into the supply chain through early payment a bad idea vs. currently asking their suppliers to pay 36% interest for access to that cash. Corporations will extend DPO to optimize working capital and use the cash to build capacity or buy companies. Any company with an IRR equal/close to their cost of debt capital won’t be around very long.
It is not realistic to think that all suppliers in the chain can get up and running on SCF solutions in the short-term, but even if technologies and process improvements allow buyers to pay earlier and capture discounts, the idea is that some day there will be no discounts to capture. In the short term, capture all the discounts you can, because they benefit the buying organization, but if this is your only offering from a vendor point of view, you probably only need a 3 – 5 year business plan.
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