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The Power Of Complete AP Automation In Dynamic Discounting

If used properly, dynamic discounting can help businesses improve cash flow and establish beneficial relationships with their suppliers. A portion of vendors would have a higher demand for cash and could be more prepared to offer a concession in exchange for transaction acceleration when payment terms are stretched, and policies compel banks to hold greater funds before financing small firms. Companies pay their suppliers early in exchange for lower pricing and receive an enticing annual percentage rate (APR). Expedited payments imply suppliers won’t need to borrow as much money, and 100% factoring means fewer Days of Sales Outstanding (DSO), which lowers collection expenses and increases cash flow availability.

From the perspective of working capital, it is advisable to adopt an “all-in” strategy and push AP automation to its maximum level through e-invoicing, electronic information exchange, assessed invoice settlement, interconnected Purchase-to-Pay (P2P) operations, and self-service vendor portals. A shortened invoice-to-pay cycle aids in obtaining the greatest discount.

Assure The Success Of Dynamic Discounting: Pay Attention To AP Automation

The 2017 AP & Working Capital Report by Paystream revealed that AP automation requires significant attention to remove obstacles to advance payments incentive acquisition.

These obstacles include:

  • The time it takes for invoices to be approved; 41% of respondents said this was an issue.
  • 39% of respondents cited incomplete or lacking data on invoices as a problem.
  • Lost invoices were cited by 36% as a major source of suffering.
  • Billing exceptions: 32% of respondents thought this was an issue.
  • Manually routing invoices for review and settlement was cited by 31% of respondents as a major barrier in their organizations.
  • Decentralized bill receipt: 30% found this uncomfortable.

Gaining the transparency, management, and speed of processing necessary for the effective implementation of dynamic discounting efforts depends on AP automation. An AP automation solution “simplifies and shortens billing cycle times, resulting in enterprises’ having a considerably better capability to secure early payment discounts,” the paper states. According to PayStream, clearance times decrease from an average of 45 days with no automation to an average of 5 days with minimal paper use.

The Cornerstone Of A Dynamic Discounting System Is Shaped By Spending Analytics

Without knowledge of supplier spending, invoice numbers, and payment schedules, it is hard to assess the possibility of such a dynamic discounting plan or determine the discount conditions that would generate the most interest. A dynamic discounting mechanism can be defined using expenditure analytics technology. A dynamic discounting method can be based on a variety of expenditure analytics dimensions, including:

  • Monthly expenditures by the supplier
  • Using PO or non-PO invoices to determine the distribution
  • Terms and method of payment
  • Tools for enterprise resource planning
  • Information from general ledgers, or the financial details of an institution
  • Orders for goods
  • Data exchanged by vendors
  • Risk assessments
  • Credit scores
  • Transactional data
  • Additional internal systems and outside resources

The way businesses may now gather specific spending statistics even on non-PO bills has changed dramatically over the past few years as a result of the rapid development in automation in the payment managing system and software, such as machine learning.

Dynamic discounting with the help of AP Automation allows the organization to take advantage of the highest gains based on a well-organized optimization framework that was developed utilizing previous data. The framework can be used to start negotiating payment standards and possible discounts with providers based on region and/or industry.

A Well-designed Shortened Invoice-to-pay Cycle Yields Long-term Advantages

Companies that issue invoices on paper use a lot of labor. The average invoice-to-pay cycle in such a situation lasts 30 to 120 days. Today, many solutions are available to enable digital invoice processing. Companies just need to choose an appropriate AP automation strategy.

The majority of AP automation projects contain some, if not all, of the long-term objectives listed below:

  • Decrease processing times and expenses
  • Lower rejection frequencies and other problems with invoice processing
  • Create a more efficient vendor payment plan to handle cash more effectively, limit spending, and maximize working capital
  • Reduce late fees and late payment fines as much as possible
  • Utilize data to make your operation more intelligent
  • To enhance performance and management, communicate AP data with operational stakeholders
  • Enhance relationships with suppliers and customers
  • Gain improved insight into the performance of the process, line items, and suppliers
  • Become more adept at accurately and promptly closing the “books” for the accounting period

Some factors to take into account include company-specific pain points, suppliers’ openness to adopting new employment practices, the competencies of the current network, and the viability of alternative approaches for each type of supplier.

Using AP Automation, You Can Receive Additional Early Payment Discounts 

As you may expect, when all AP operations are computerized and automated, it is simple to receive discounts for early payments. In addition, there are other incentives available. If you settle a bill before 10 days as opposed to the mandatory net of 30, you not only receive the 2% price reduction (or whatever it boils down to), but you also qualify for dynamic reductions. These present you with an even bigger chance of profit.

Why do dynamic discounts exist? Discounts are given on a rotational basis starting on the first day and continuing till the final due date. They can be so profitable that complete e-commerce solutions have been developed around them. These implementations will enable the AP department to move fast and take advantage of all available advantages.

With a manual procedure, the typical AP staff will:

  • Spend around $6 to $15 handling invoices (some AP departments charge up to $25+)
  • Require 10 to 15 days to settle the payments (the lowest performing taking up to 20 days)
  • About 80% of invoicing processing is done on paper
  • Approve, process, and pay some or most of the bills manually

A fully automated accounts payable procedure, on the other hand, will:

  • Spend $2.18 on each invoice you process on average
  • Take 2.8 days on average to process a bill
  • As little as the possible paper is used.
  • Utilize an automated procedure to cut back on wasteful spending and boost productivity

(Source: Aberdeen Group)

You may reap the profits of such rewards for possible cumulative benefits of more than $5 each payment by using a payment automation system. If your company issues 20,000 checks annually, you might normally receive profits of more than $100,000.

The appropriate technological foundation helps achieve the desired Impact

A company willing to pursue AP automation and dynamic discounting can:

  • Judge vendors based on their capability to handle non-PO invoice-led inconsistencies
  • Minimize disruptions in the invoice approval processes
  • Offer additional traceability into purchase orders in various formats from numerous source materials
  • Remove or decrease manual processes
  • Start providing stronger emphasis on anomalies. 

The performance of dynamic discounting is also heavily influenced by the efficiency of vendor supplier interaction and collaboration with AP automation projects. The vendor network needs to make it easier to interchange all types of paperwork digitally without being required to pay additional transaction fees. Most importantly, it must include dynamic discount administration features. 

Here are a few examples:

Analytics and Supply Chain Financing Working Together

All parties profit when third-party financiers, purchasers, and suppliers are connected electronically. Both the customers and the sellers have the option of prolonged terms. In this open digital space, both parties can live in harmony.

AP automation enables you to analyze each payment for relevant supplier data and searches for chances for contactless transactions, going beyond the usual quarterly outreach to suppliers. Because electronic payments are 10 times more affordable than paper checks, ongoing vendor outreach results in additional savings for you.

More control Of DPO And Cash Release

As you may expect, increasing the days payable outstanding (DPO) will boost your revenues. You can keep your backup money on hand longer if the AP staff uses technological tools rather than manual ones.  An electronic solution can give a company more control over when they pay vendors and thus more control over their DPO.

How? Utilizing electronic payment alternatives will hasten the completion of your payments. The requirements of complicated AP processes with numerous hierarchical levels, intricate approval workflows, different sites, several bank accounts, and foreign payments are met by payment automation solutions.

Consider the amount of time you could start saving if you weren’t required to manually manage checks.

Accounts Payable Automation’s 4 Foundations

  1. Management Of Supplier Data

Six out of ten businesses are responsible for supervising and revising supplier documentation, according to the 2017 Zycus eInvoicing Report Card. The collection, upkeep, and renewing of supplier data is a very laborious and error-prone procedure.

A 2013 Gartner study found that AP automation reduces data management costs by $850 per provider annually. The suppliers may enter and update all of the data themselves because it provides a simple self-service interface, eliminating the need for the AP department to get involved. It keeps up-to-date, duplicate-free records that can help with strategic choices.

  1. E-invoicing 

When a company adopts electronic invoicing, they save the time it takes to process invoices and increase savings. Responding to supplier inquiries to find out their payment progress is the job that takes up the majority of the AP department’s attention. An e-Invoicing system frees up the AP department’s periodic supplier inquiries by giving suppliers end-to-end transparency into data, facilitating payment tracking, and serving as a direct engagement channel. Additionally, it allows them to choose from the different possible invoice types and gives them insight into the billing cycle.

  1. Contactless Processing 

The majority of firms spend 1-3 hours per week dealing with invoice processing difficulties including redundant invoices, human blunders, regular & repeated supplier calls, etc., as per the PayStream Invoice Workflow Automation Report. These problems cost AP departments cash and effort. By removing the requirement for manual comparison, automating exception management, and offering transparency into the whole invoicing process, Contactless Processing may serve to streamline end-to-end invoicing operations, allowing AP to realize additional savings and increase liquidity. 

  1. Dynamic Discounting Tools

With the help of dynamic discounting tools, businesses may make the most of accessible discounts to sustain cash flow and maximize liquidity. It also assists in tracking organizational savings targets with simple and timely indicators.

Regardless of how your AP department is currently seen within the company, AP will eventually become more strategic. Automation is necessary to maximize AP’s capacity to deliver priceless strategic inputs.

The Bottom-line

The chance for early payment discounts is significantly increased by extending net payment periods and offering sliding scale discounts after the usual discount date. Spending analytics, a shortened itemized receipt cycle, and best-in-class P2P solutions should be combined by businesses looking to significantly enhance financial KPIs through dynamic discounting. CFOs may optimize the financial supply chain and play the part of a genuine strategic partner by acquiring visibility into where funds are spent, adopting a contactless AP procedure, and fostering supplier cooperation and discounts captured through a specialized supplier platform.

October 9, 2022