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So you want to move to invoice automation – imaging, workflow, or even electronic invoicing. Problem is, your CFO, Controller, AP Manager, or IT staff hasn’t bought in. You’ve got a plan, but don’t have the buy-in to start.So what is the surefire way get your project approved?
PayStream has developed simple metric – PIQ (paper invoice quotient) – to analyze operations and simplify the way management thinks about AP. PIQ is a simple way to better communicate the opportunity to management. It is a score derived from a standardized survey to measure your organization’s level of dependency on paper in AP.
PIQ includes two different concepts: efficiency and effectiveness.For example, an efficiency metric would be determining that your cost is $6 per invoice to process. The effectiveness metric is how long it takes to process that invoice. Typically, AP will say that it takes 24 or 48 hours to process, or during rush times maybe a week. However, that’s only part of the story. You need to know how long the invoice takes from the viewpoint of the supplier or CFO.
PIQ tracking starts at the invoice date and ends on the day the corresponding voucher is approved in your accounting system. The PIQ is then calculated by taking the approval time divided into the percentage of electronic invoices. By weaving in these two concepts, PIQ makes it simple for you to demonstrate opportunity to your senior managers.
Metrics and Your PIQ
PayStream conducted an AP Benchmarking Survey in the Fall of 2009 and asked survey respondents questions that would serve as guideposts to help other AP departments benchmark their business. The number one response (65 percent) to the biggest opportunity inside of AP was process inefficiency. Everyone wants to provide AP services cheaper, better, and faster.
The second ranked opportunity (53 percent) was improved visibility, which is driven around discount management. In other words, there’s a frustration, especially among senior managers, about invoices floating around the organization and not being in the company’s ERP system.
We call this “invoice float” because the invoice is moving around the organization and may be sitting on someone’s desk, perhaps because the person is on vacation, investigating a discrepancy, or wants to post the invoice in Q4 rather than Q3.
Envisioning Your ROI
The first source of ROI is AP efficiency. Reducing processing costs and speeding up the process will account for anywhere from 25 to 35 percent of the opportunity. The remaining percentage comes from spend visibility; how money is being spent and the timing of that spend. The next piece is working capital authorization. Having better visibility to the spend can allow you to take advantage of paying some suppliers early in exchange for a discount.
Having a broad foundation to your business case means bringing in other business units and working with your counterparts—including Treasury, Procurement, and Finance.It’s vitally important to consider all of these elements together.One of our clients received approval for an AP project in the past, only to have the assistant controller reallocate the funds to another project. When we did an analysis, we found that the AP manager had only included about 24 percent of his business case. He missed a huge chunk of opportunity.
The one tip that we always like to suggest is that you should visualize your ROI model.The first thing you will notice is that there is some red, which means that it’s going to cost money before you start saving money. The first thing that the people reviewing your business case want to know is how much the project is going to cost. It’s important to show that you have a realistic plan and understand that it will go negative before positive.
The Four Truths
When it comes to AP automation, there are four truths you need to face and overcome to achieve success:
1. Phantom Pain. The people who make the decisions about AP automation don’t really understand the pain of suboptimal processes, because they aren’tinvolved in AP. That’s why you need to make it simple for the CFO, controller, or IT manager to understand your pain and business case.
2. The End of Meaningless Metrics. To convince the right people, you have to communicate in their language, not the language of AP. Present your facts, compare yourselves with others, and show the the dollar value of your proposal. Make them feel the pain of a competitor or other recognizable innovator that is meaningful to them. Everyone wants to be least as good as or better than the Joneses, including your managers.
3. Making the Case. When building a broad foundation, remember that it’s not just about AP efficiency. It’s also about servicing your suppliers and making it easier for them to do business with you.
4. Destination Blues. You need to paint a picture of your vision; where you’re trying to go with automation. The vision is not that you’re going to use OCR or set up an electronic invoice portal, but rather that you want to move to a touchless process in AP. Management can equate a touchless process with reduced costs and increased visibility into the number of invoices and accruals. The destination blues involves convincing the people who need to approve your efforts.They won’t necessarily understand the technology, so you need to simplify it for them.
Did you ever wonder why business-to-business transactions are typically settled in 30 days? Why not when goods or services are delivered? Ironically, the concept of trade terms were invented by the Greeks who needed a system to allow for transportation delays. In today’s economies, we have eliminated many of these delays — and drastically improved the information flows about trade. In fact, a new set of tools — Supply Chain Financing and Dynamic Discounting are rapidly changing the options around supplier payments.
Supply chain financing is demonstrating value in the weak economy as more organizations and suppliers learn how to use it, experts say. It’s most prevalent in retail and manufacturing, but ANY industry can take advantage of these tools due to the availability of new solutions. “Supply chain financing is still in the early stages”,” says Henry Ijams, managing director of PayStream Advisors research and consulting firm in Charlotte, N.C. “However, this intriguing concept is gaining lots of interest in 2009 due to the ability to extend early payments to suppliers based on the strength and credibility of the payer.”
Accelerated payments for a discount are not new. In fact, tools such as asset based lending and factoring have been in use for many years. In a factoring relationship, early payment is based largely on the credit of the vendor who’s trying to discount the receivable. With supply chain financing, whether the customer is Electrolux or Joe’s plumbing they get the same discount rate for accelerated payments. Moreover, a new internet based marketplace, called The Receivables Exchange, is now making it much easier for suppliers to access early payments from a variety of lenders.
The Receivables Exchange
This new twist to supply chain financing, Ijams says, is the concept of a non-bank third party lending the money for the supplier. For example, The Receivables Exchange www.receivablesxchange.com in New Orleans bills itself as “the world’s first electronic marketplace for trading accounts receivable.” Online, lenders that might include private individuals or hedge funds can compete to buy the invoice a major corporation has guaranteed to pay a vendor. Ijams describes the Receivables Exchange as a supplier friendly marketplace for selling receivables to investors and other lenders. “This is a brand new capital source that utilizes the Internet to facilitate transactional transparency fostered by buyer and seller ratings. Think eBay for receivables financing.”
“What we like about the Receivables Exchanges is its powerful ability to allow more people to participate in the financing of trade payables,” he says. “Our analysts think this has some powerful dynamics in 2009. While the credit markets have been disrupted, those who still have cash, like hedge funds, are looking for places to invest money.”
“Supply chain financing is becoming more significant as invoices are approved faster with automated matching and workflow,” he says. So far, the concept seems to be a win-win for everyone involved. “With SCF, once AP has approved a payable, and know they’re going to make payment, the buyers shouldn’t care if someone else is using a promise to pay to swap that for early payment. In fact, buyers should promote the use of SCF because it means someone else can potentially lend that supplier money at lower risk and zero cost to us, the payer.”
Future trends
Finance professionals need to stay up to date with the trends happening in supply chain financing – including its “cousin,” dynamic discount management, says Ijams. The concept involves paying suppliers early in exchange for an attractive discount, which lowers the cost to the organization. It goes against the old adage “Collect early and pay late.”
Staying ahead
The changes in trade payables present a major opportunity for AR, Billing Managers and AP departments to shine, Ijams says. “Innovative billing and treasury managers must continue to insert themselves into finance opportunities to help their companies find ways to speed up the invoice approval and cash receipt processes. Effective collection strategies will be based on a continued contraction of the invoice-to-approval time.”
Research by PayStream Advisors shows the average approval time for invoices (from Invoice Date to posting or approval date) for F1000 businesses is 20 days. That leaves only 10 days of potential early payment time for a supplier, minimizing the opportunity for early payment, he says.
Many organizations will not realize how supply chain financing can serve them until innovative finance professionals bring it to the forefront, Ijams says. “It’s a way for finance and treasury managers to heighten their credibility and improve their importance in the organization. … in order to be a value-added players, today’s finance managers have to be the eyes and ears of an organization by looking for new opportunities to focus billing and collections organizations on continuous improvement.
REPORT: Eight Building Blocks of Invoice Automation, Supply Chain Finance & Discount Management
AP Automation including Invoice Automation and Discount Management (IADM) initiatives need a framework to ensure that programs are approached on a strategic basis which bridges both the Supply Chain and Finance organizations. PayStream’s analysts have introduced such a framework to help enterprises implement integrated IADM and maximize benefits.
To achieve the long-term value of Invoice Automation & Discount Management (IADM), organizations need to adopt a strategy involving both Procurement and Finance and therefore initiatives should be approached at an enterprise level. So far, only a limited number of enterprises have stepped up to this challenge and are implementing what PayStream Advisors calls integrated IADM optimization. This number is steadily rising, as corporate enterprises begin to achieve benefits in their first attempts at IADM and realize what really needs to be done. Our most recent research survey that many enterprises are still implementing electronic invoicing or stand alone Discount Management or Supply Chain Finance programs, not truly integrated projects.
When companies focus on planning, as opposed to implementation, PayStream estimates that:
Nearly 30 percent of surveyed enterprises have plans that would fit the integrated IADM description.
Approximately 50 percent of those are planning a Level I approach (not integrated)
Less than 20 percent are planning an integrated approach which brings together buyer/supplier collaboration with electronic invoicing.
More than 15 percent are considering global initiatives to inject third party financing into their supply chains
Integrating Invoice Automation and Advanced Finance Tools such as Dynamic Discount Management or Supply Chain Finance is not easy. It requires a multi-disciplinary vision and leadership to drive a focus on unleashing working capital from the trade Invoice and receivables, otherwise it will remain fragmented. It involves difficult changes to processes, and external organization that can make implementation difficult. Organizational and cultural barriers exist between Supply Chain/Procurement and Finance managers making clear thinking on IADM difficult.
The technology support seems easy but it isn’t. Technology staff must grapple with the challenges of getting invoices approved faster, multichannel alignment, and systems integration. Even if the CFO accepts the need for enterprise-level IADM, the quarterly demands of procurement and working capital targets, especially in delicate economic conditions, make IADM one of the the most important challenge facing the finance organization, but not the most urgent for the CFO. This typically results in a focus on tactical quick wins until conditions are better.The main reason enterprises are not implementing integrated IADM is an inability to see the big picture and understand what is involved.
Just as a map helps you understand the context of your journey (the roads you need to navigate and alternative routes), so the PayStream IADM framework helps enterprises make decisions about the best route and objectives for their situation.
Following an analysis of several larger corporate enterprises, PayStream Advisors has created a IADM framework, or map, called “The Eight Building Blocks of Invoice Automation and Discount Management (see Figure 1) to help enterprises see the big picture, make their business cases and plan their implementation. The framework can be used for internal education and debate in developing the IADM vision and IADM strategies. It can then be the basis of an assessment of the enterprise’s current and required IADM capabilities, to help understand its current position and future strategy.
Using this framework, PayStream Advisors is currently profiling several enterprises that are great examples of IADM at work.
Core Topic
Supply Chain Financing: Optimizing Working Capital through the strategic use of financing and discounting in the supply chain
Key Issues
During the next five years, how will cash management strategies, processes and technologies evolve to enable enterprises to improve the use of working capital tied up in trade Invoice and receivables?
What is IADM, how will it evolve, and what drivers are emerging to force its adoption?
What is the senior finance executives in successful IADM initiatives?
Strategic Planning Assumptions
Through 2008, 90 percent of successful IADM initiatives will balance the needs of improved supplier relationships with working capital improvements Enterprises that have a wide differential between their and their suppliers cost of capital are twice as likely to achieve adopt IADM and Discount Management goals.PayStream’s Building Blocks research and report will be released at the September 10-12th PayStream Summit, in Orlando, FL. Those finance and supply chain managers whom desire the latest information, tools and techniques in Invoice Automation and Discount Management should reserve their delegate representation at the conference
Supply Chain Finance and Payables Discount Management (SCF/DM) initiatives need a framework to ensure that programs are approached on a strategic basis that bridges both the Supply Chain and Finance organizations. PayStream’s analysts are working on such a framework to help enterprises implement an “integrated” Supply Chain Program, and have created the Eight Building Blocks of SCF/DM framework to get our clients started. Just as a map helps you understand the context of your journey (the roads you need to navigate and alternative routes), so the SCF/DM framework helps enterprises make decisions about the best route and objectives for their situation.
To build on this theme, PayStream will host an educational conference “Supply Chain Finance - Discount Management Summit” in June 2008 to bring together supply chain and finance executives to explore the future opportunities in working capital. The theme of this year’s SCF conference is Uncovering Working Capital in your Supply Chain. PayStream has also created the Supply Chain Finance Excellence Awards to recognize those companies which show leadership in their working capital optimization programs.
SCF/DM is a business strategy that optimizes working capital and supply chain collaboration for both buyer and supplier relationships by seeking tailored payment terms for services and materials. As an example, a Paystream Client, a multi-national services company with over a billion in annual domestic spend approached us to help them define the opportunity for a FSC-DM program. With less than $400,000 in set up costs, our client will generate over a million dollars per year in hard dollars benefit from working capital improvement AND the project will turn a positive ROI in only 8 months. SCF/DM/DM includes both structured financing programs and early payment discounting for supply chain payments, fostering working capital centric processes.
SCF/DM programs enable:
Greater payables and receivables visibility
Increased access to payment scheduling
More effective supply chain interactions
Integration throughout all supply channels and back-office billing and invoice functions.
To achieve the long-term value of Supply Chain Finance and Payables Discount Management (SCF/DM), organizations must adopt a strategy that integrates both Procurement and Finance. Therefore initiatives should be approached at an enterprise level. Recent research shows that many enterprises are still implementing SCF or DM programs, but not truly integrated projects.
A cohesive and integrated vision starts with an overall Supply Chain Finance value proposition. The responsibility for creating the SCF/DM vision clearly lies in the CFO & Treasury Suite. The most fertile environment is one in which the chief finance officers understand what SCF/DM means and is receptive to new ideas and ways of working. The SCF/DM vision must be well-known and accepted throughout the enterprise and the supplier base. With this in mind, it is useful to have a meaningful, company-specific definition of Working Capital goals.
Following an analysis of several enterprises, PayStream Advisors has created a SCF/DM framework, or map, called “The Eight Building Blocks of SCF/DM” to help enterprises see the big picture, to make their business cases and to plan their implementation.
The framework can be used for internal education and debate in developing the SCF/DM vision and SCF/DM strategies. It can then be the basis of an assessment of the enterprise’s current and required SCF/DM capabilities, to help understand its current position and future strategy. Using this framework, PayStream Advisors is currently profiling several enterprises that are great examples of SCF/DM at work. The eight building blocks in the model are the fundamental components for effective integrated SCF/DM. Beneath each component are a variety of interlinked capabilities. A key feature of the framework is to emphasize the need to create a balance between the requirements of the company and the working capital.
Integrated SCF/DM is an enterprise-wide initiative, where the enterprise knows how it wants to manage working capital and supplier interactions and puts all relevant capabilities in place to achieve those goals.
A solid SCF/DM vision and strategy Supportive set of integrated initiatives in the areas of,
Supply chain and finance collaboration
Working capital compression goals
Invoice visibility processes
Automated payments
Supporting technology
Measurement & improvement metrics
The eight building blocks in the model are the fundamental components for effective integrated SCF/DM. A key feature of the framework is to emphasize the need to create a balance between the requirements of the supply chain and working capital – a task that is easier than many think.
Vendors for years have used invoice discounts as a means to entice buyers into paying sooner. Under standard discounting terms, such as 2/10 Net 30, buyers receive a 2 percent discount for paying their invoices 20 days early. Since suppliers control the discounting process, buyers hoping to pay invoices early at a reduced price have little option to hope their suppliers offer a discount.
However, like with most accounts payable processes, improvements in technology are changing the way companies look at invoice discounting. Technologies such as electronic invoicing and electronic payment are giving buyers more control over the discounting process. This new form of discounting, which allows buyers or vendors to initiate discounting terms, is known as dynamic discounting.
What is Dynamic Discounting?
The phrase “dynamic discounting” describes a variety of solutions offered by software providers that allow buyers and suppliers to offer and amend invoice discounts electronically. The process is called dynamic because of the emphasis on two-way communication and discount adaptability.
One of the hallmarks of dynamic discounting is the ability for buyers to take advantage of sliding scale discounts. Unlike traditional 2/10 Net 30 discounts, which expire the tenth day, buyers can capture sliding scale discounts throughout an invoice term. Discount amounts are reduced each day as the original invoice due date approaches.
Dynamic discounting is a relatively new process, having been introduced in the early 2000s. The capability is typically found in procure-to-pay solutions with supplier networks such as Ariba or Xign. Increased use of these supplier network solutions has helped fuel the growth of dynamic discounting.
Automation as a Pre-Requisite
Unlocking the full benefits of dynamic discounting requires the buyer to have already automated many of their accounts payable processes. According to Henry Ijams, president of PayStream Advisors, dynamic discounting relies greatly on the speed in which a department can approve an invoice for payment. “It [dynamic discounting] works much better if the approval time on the invoice is fast,” he says. “It all hinges on speed.”
To facilitate this speed companies should implement electronic invoicing, automated workflow, and electronic payment.
Electronic Invoicing and Workflow
Electronic invoice processing is the best way to ensure that a buyer’s approval time is short enough to take full advantage of dynamic discounting. PayStream research states that it take the average AP department 15 days to receive a paper invoice. By the time the paper invocie arrives, the company has lost most of its time to capture a sliding scale discount and all its time to capture a standard 2/10 Net 30 discount. This is called “paper delay.”
Adopting electronic invoicing allows buyers to receive invoices immediately following a purchase, giving them plenty of time to capture discounts.
Automated workflow technology is alos vital in bringing down invoice approval time. Workflow technology can automatically route and approve most invoices instantly, as opposed to manual approval processes, which can last days or weeks.
Electronic Payment
In addition to electronic invoicing and workflow, companies that have implemented electronic payemtn methods find it easier to capture invoice discounts. Payments from companies that issue checks are subject to the same paper delay as paper invoices. An inefficient check payment system can undermine any discounting program, dynamic or otherwise.
“If a supplier agrees to take an early-payment discount and the payment goes through a check-writing process and is not received for a week so , the early payment they were anticipating will not materialize,” says Drew Hofler, senior manager of financial solutions for P2P solution Ariba. “They are not going to likely accept another discount offer.”
When paying invoices electronically, using either automated Clearing House, wire transfers, or purchasing cards, buyers have more control over payment timing. On the other hand, if companies receive paper invoices and pay vendors with paper checks, their ability to capture any invoice discount diminishes.
Offering the Discount
Dynamic discounting creates a fundamental shift in how invoice discounts are offered. Under the traditional 2/10 Net 30 discount model, buyers can take advantage of discounts only when offered by the supplier. When buyers can propose invoice discounts under this model through negotiations, the process requires terms to be set weeks or moths in advance.
According to TAPN’s Early Payment Discount Survey, 76 percent of respondents do not propose invoice discounts to their suppliers. Proposing discount terms to suppliers under traditional discount methods can be difficult and time-consuming.
With dynamic discounting, buyers have the ability to propose invoice discounts independently from preexisting terms. The discounts can be offered at any point in the transaction cycle. All that is required is that the buyer and seller have a way to communicate electronically.
Buyers often propose dynamic discounts using an interface in their P2P system. If the buyer wishes to pay a particular invoice early, they send a message to the vendor through the supplier network. The message typically states that the invoice has been approved and the buyer is willing to pay early in exchange for a suggested discount rate. The vendor may approve or decline the discount. If the vendor is not a member of the buyer’s supplier network, the message is sent via email.
The process works smoothest when the vendor is a member of the supplier network because efficient two-way communication is achieved. In addition, vendors who join a supplier network can take advantage of other services such as electronic invoicing, which greatly enhances a discount management system.
Supplier networks such as Ariba recognize the value that having vendors on a network brings to the buyer and, as a result, typically do not charge vendors to join. Ariba plans to use dynamic discounting as a means of signing up new suppli9ers as part of an initiative called Approved Invoice Quick Enablement. Under the program, when a supplier agrees to accept a buyer-propose discount, they are taken to a form where they create a vendor profile. Once created, they have access to discounting functions with the buyer, as well as other services such as electronic document exchange.
“The [suppliers] go into the network to their inbox where they see all their payment offers, all their invoices, and all their discount offers in one place,” Hofler says. “They can send POs and invoices over the network too if the buyer wants that.”
Determining the Discount
Having a system in place to facilitate dynamic discounting is only part of the process. Buyers must also determine the discount rate they will propose. If the rate is too low, the buyer sees no benefit from paying early. If the rate is too high, suppliers will not accept it. The goal is to find a balance.
P2P solutions that offer dynamic discounting often allow buyers to indicate a discount rate they want to offer a vendor. This rate can apply to a single invoice, all future invoices, or all invoices that meet a certain requirement, such as particular dollar limits. If the supplier agrees, the discounts are applied automatically.
Paystream data states that the average invoice discount achieved from buyer-proposed discounts is between 1.6 and 2 percent off the original price. In addition, buyers who report achieving these discounts tend to pay their suppliers about 10 to 15 days before the invoice is due. Because dynamic discounts are typically on a sliding scale, paying closer to the due date would result in buyers still receiving a discount, albeit reduced.
With the average buyer-proposed discount saving buyers 2 percent for paying 15 days early, the savings are not considerably different from the standard 2/10 Net 30 terms. However, the sliding scale discounts appeal to buyers because, even if they pay on the 29th day, they still receive a small discount. Suppliers enjoy the sliding scale system because it encourages buyers to pay invoices early beyond the standard ten-day discount.
Benefits of Dynamic Discount
Dynamic Discounting is generally considered a single component of a wider discount management program. Buyers propose dynamic discounts to the suppliers that are onboard with the program and negotiate standard terms with the rest. Discount management programs provide several benefits to buyers. These benefits include:
1) Reduced Spend. According to TAPN benchmarking data, a majority of companies taht implement discount management plans typically get between 1 percent and 20 percent of their vendors on board. While the percentages will likely increase, expecting to enroll 100 percent of vendors is unreasonable because there are many types of spend, such as utilities, that cannot be discounted.
Hofler says companies whose discounting provider actively enrolls vendors can expect to achieve discounts on 80 percent of their discountable spend within two years of implementing a discount management plan, which adds up to 0.3 percent of total spend. “That is a reasonable expectation to achieve in discounts,” he says. “That’s about $3 million out of $3 billion of total spend.”
2) High Rate of Return One of the main reasons companies typically delay paying vendors is a desire to keep as much cash on hand as possible. Paying early means buyers give up their cash cushion. However, P2P providers contend that the savings earned form a discount management program surpass the interest a buyer could earn by placing that money into a short-term investment.
With buyers typically receiving a 2 percent discount on their purchases, the money saved by paying a vendor’s invoices early adds up to a 36 percent annual return on cash. Other short-term investments in which buyers can hold money before paying invoices, such as mutual funds and money market accounts, usually pay between 5 percent and 10 percent annually.
3) Expand Discount Opportunities. Dynamic discounting allows buyers to increase the number of vendors from which they receive discounts. Standard discount terms are negotiated ahead of time by procurement. Because procurement does not have the capacity to negotiate discounts with all vendors, they tend to focus on the largest-volume suppliers.
Dynamic discounts can be offered at any time; they do not require terms to be negotiated beforehand. Offering a small company an invoice discount simply requires sending them a message explaining the terms. If they accept, the discount is applied.
“A procurement organization would never deal with these [smaller companies] because they don’t have the bandwidth,” says Chris Rauen, Corporate Marketing Manager for P2P solution JPMorgan Xign. “When you have a network in place, suppliers can sign up over the web. With no extra cost, a whole new category of suppliers can be populated into the network and allow their buyers to increase their return on cash by paying these suppliers early.”
Rauen says these smaller businesses, which usually represent about 80 percent of vendors and 20 percent of spend, are more likely than larger companies to accept discounts higher than standard terms. In some instances, smaller companies are willing to accept discounts as high as 5 percent because they are “hungry for cash.”
Implementing Dynamic Discounting
Implementing a successful dynamic discounting program requires buyers to understand their invoice payment procedures and be able to improve them if necessary. The goal behind most improvements should be to reduce overall payment time, which is the primary hurdle preventing companies from taking advantage of vendor discounts.
Buyers considering dynamic discounting - or simply curious about the effectiveness of their existing discount management system - should examine the following metrics:
Average days to receive an invoice
Average days to pay an invoice
Percentage of offered discounts captured
Percentage of offered discounts missed
A thorough understanding of these metrics can help companies determine where the holes in their invoice approval process are. Bringing invoice approval times down makes companies more capable of capturing discounts and offering them to their suppliers.
“Businesses need to have a very fast internal approval time or adopt e-invoicing,” Ijams says. “Today, many companies do not have the visibility (into their payment process) to know when payments are due because average receipt-to-approval times are so long. They are constantly just paying what’s coming in.” Reducing approval times - ideally through automation - is the key to adopting dynamic discounting.
Technology Requirements
According to Hofler, dynamic discounting functionality is included in most P2P solutions and requires little to no additinoal technology to implement beyond joining a network. In addition to the solutions, which are typically installed in a buyer’s system as opposed to a web-based on-demand solution, are capable of integrating into most standard Enterprise Resource Planning solutions (ERP). Once integrated, the two solutions can feed data into one another, meaning the discounting system automatically knows when an early payment was made.
Hofler says, “Dynamic discounting really benefits from full EIPP, and nojust the ability to send documents and invoices through the network. While that does speed up the mail process, buyers also need to approve those invoices and automate workflow so you can get an average approval rate of three days instead of 20.”
Why Pay Early?
Invoice discounting is not a new phenomenon. However, Advances in technology have replaced the former supplier-controlled discounting process and made it much more dynamic. Suppliers interested in getting paid early to maximize cash-on-hand and buyers interested in paying early to save money both have the opportunity to propose sliding scale invoice discounts.
Although some buyers may have reservations about paying suppliers early, Ijams believes the cost savings make it worth their while.
“if you think about it, the whole process seems counter-intuitive to AP,” Ijams says. “Why would I want to pay my suppliers early? We’re taught in finance to collect early and pay late. But what if someone said, ‘if you pay early, I’m going to give you a big, fat carrot for doing that’?”
Just this past week, Henry Ijams and I were talking about how, despite the rapid gains in the ePayables world, financing and integration continue to be problematic. Case in point: A client mentioned that early payment discounting is very inticing, yet currently out of thier reach due to lack of liquidity to invest in paying suppliers early. Henry and I went on to conclude that, until a solution came along to offer easy access to supply chain financing in the order of magnitude of, say, a p-card solution for larger ticket purchases, many discounts would continue to be lost even as technology for capturing became evermore sophisticated.
Enter JPMorgan Chase. They walked us through their newest ePayables solution on Friday, and Henry and I were not just impressed - we were blown away that the new Xign owners have responded so quickly to this giant market opportunity. AP Trac is being marketed as an integrated solution, a sort of “killer app,” so to speak, for the electronic payables market.
AP Trac, along with ExacTrac(SM) and pre-built adapters of the Xign Order-to-Pay solution, looks to give finance and AP managers the control they need to move to ePayments , while making financing and discount capture a reality in a way it had not been before. AP Trac uses the same ExacTrac single-use card functionality to pay suppliers electronically via a consolidated interface with their ERP System. In instances where the buyer doesn’t have the funds for early payment, JP Morgan can advance funds on behalf of the payer and settle with them up to 30 days later. Of course, you have to be credit approved by JP Morgan.
AP Trac leverages an enormous amount of technology in its Purchase to Pay integrated approach. JPM Xign calls this their Order to Pay product. A web-based environment provides a variety of tools for PO authorization, buyer initiated financing, fast invoice reconciliation, and dynamic payables discount capture.
Perhaps the most exciting feature of the system, however, is its ability to inject supply chain financing on a large scale. Common wisdom is that 80% of business-to-business transactions are settled with checks - In the AP automation world, we’re constantly made aware of the inefficiency of standard B2B payment processes. But even for those companies that have begun to take full advantage of electronic payment solutions, the promise of on-demand supply chain financing on the scale that JPMorgan Chase is offering is very exciting. More payers will be able to offer dynamic discounts for their suppliers.
The AP Trac mechanism is a sort of virtual account which settles the payment via the card network or ACH. Regardless of the settlement mechanism, the seller gets a postable ePayment together with full remittance details. According to our latest research report on P-Cards titled Purchasing Card Management: Technology is a Savings Tool, the average p-card transaction is $270; Paul Simons of JP Morgan Chase’s Global Treasury Services says that virtual account transactions are on average five times larger. In effect, JP Morgan Chase’s AP Trac system allows its clients not just for a highly efficient ePayables solution, but also for the financing required to consistently take advantage of dynamic discounts.
This is an exciting turn of events - Needless to say, it is rare to see solutions that take into account such a wide scope of business payment transactions. I’m sure that we will continue to be discussing AP Trac here at Paystream Voices.
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.
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.
Until recently, automation efforts in the accounts payable area were focused on invoice and payment management and the operational benefits that technology delivers – cost containment and productivity enhancement. However, all this is changing. Innovative financial managers are now recognizing AP automation as an area that offers significant strategic benefits as well - the ability to accelerate invoice processing to enhance discount capture, strengthen working capital positions and build stronger trading partner relationships.
Dynamic Payables Discounting is a process which allows buyers and sellers of commercial goods and services to dynamically change the payment terms — such as net 30 — to accelerated payment based on a sliding discount scale. Dynamic Payables Discounting is “Dynamic” in one or more ways.
Dynamic Payables Discounting:
Allows supplier to control payment timing
Discount amount is calculated dynamically based on the number of days remaining until the due date.
Discounts do not need to be negotiated in advance, rather can be taken dynamically as working capital needs dictate.
Trading parties can tap into an alternative source of working capital with the use of third party creditors whom pay early on behalf of the buyer.
