Dynamic Discounting vs. Supply Chain Finance

by Richard Pollina | Mar 31, 2022 | Accounts Payable

Despite the fact that the two are fundamentally distinct, dynamic discounting and supply chain finance have several similar characteristics. 

Dynamic discounting and supply chain finance are two terms that are frequently used interchangeably. However, dynamic discounting and supply chain finance are commonly seen as different solutions even though they are both early payment solutions used by a buyer.

It can be pretty complex when deciding which one to employ as part of a working capital plan. This article compares dynamic discounting with supply chain finance to help you make the right decision when it comes to choosing one among the two methods.

What is dynamic discounting?

Dynamic Discounting refers to both the method and the technological systems that allow buyers and suppliers to modify standard payment terms. The core concept behind Dynamic Discounting is that the buyer offers to pay the supplier earlier in exchange for a predetermined discount depending on particular buyer-specified parameters.

The suppliers are given a discount rate dynamically depending on how many days earlier the payment is made. It enables suppliers to achieve a perfect balance between costs and payment deadlines. The earlier payment is made, the higher the discount. The buyer typically sponsors dynamic Discounting systems.

What are the benefits of dynamic discounting?

1. Buyers can strengthen their relationships with suppliers by providing early payment and access to a user-friendly system.
2. The most significant financial advantages for the buyer are the exclusive discounts obtained. There is no float or rise in Days Cash on Hand (DCOH), but the buyer receives the whole amount of the values.
3. Suppliers can pick which invoices to accelerate and when they want to be paid using dynamic discounting.
4. Suppliers can improve their cash conversion cycle by receiving early payment, which lowers their day’s sales outstanding (DSO).

What are the disadvantages of dynamic discounting?

1. suppliers who participate in a dynamic discounting system agree to lower their prices and, as a result, face a minor blow to their profitability. This can sometimes affect small-scale suppliers. Therefore suppliers should analyze their financial health to ensure that they can sustain in the dynamic discounting system.
2. The banks also take a hit due to dynamic discounting. The unexpected withdrawal of money caused by dynamic discounting makes it challenging for banks to forecast their liquidity needs.

What is supply chain finance?

Supply chain finance (SCF) includes a third-party financing source, in contrast to dynamic discounting, which the buyer’s extra funds back. SCF/reverse factoring is often a bank-funded service that provides early payment to suppliers. When the invoice matures, the buyer merely deposits the funds into the bank’s remit-to account.

One prevalent type of SCF involves a supplier selling receivables at a discount to a bank or other financial institution as soon as the buyer confirms the payment. The third party will purchase the receivable at a discount from the supplier and receive the entire payment from the buyer on the original maturity date.

What are the benefits of supply chain finance?

1. SCF improves cash flow by enabling buyers to streamline supplier payment terms while also allowing suppliers to be paid ahead of schedule. As a consequence, both the buyer and the supplier benefit.
2. Buyers can boost working capital and retain cash for more extended periods by paying later. This allows them to fund critical development and financial activities such as innovation, debt reduction, and transformation.
3. Similarly, the suppliers get increased operating cash flow, which allows them to spend on development and business health areas.
4. Suppliers get near-immediate payments in return for prolonging payment terms (for example, from net 30 to net 90), and as a consequence, they can better estimate future cash flow.

What are the disadvantages of supply chain finance?

1. Banks (and specific third-party funders) begin supply chain financing contracts with large suppliers exclusively as it makes more financial sense for them. Therefore, small suppliers who would benefit the most cannot use supply chain finance.
2. As ineligible suppliers will not receive financial help and will have to wait substantially longer to be paid, supply chain finance may negatively affect the supply chain and supplier relationships.

Final thoughts – Which one to choose?

Supply chain finance is typically only available to near-investment-grade companies, although dynamic discounting is available for all official electronic invoices. Nevertheless, both early payment solutions aid in the provision of working capital, the improvement of trade conditions, and the maintenance of excellent supplier relationships.

Sometimes the cons of one might outweigh the pros of the same, depending on your usage and requirements. Therefore, the ultimate decision of choosing between dynamic discounting and supply chain finance is in your hands and depends on your needs. Of course, you can also opt to use both of them.

What is the Best Way to Manage your Accounts Payable?

by Richard Pollina | Mar 29, 2022 | Accounts Payable

There is always room for improvement in your business. You should follow this principle to make sure that your business always prospers. Such dedication is required to achieve better revenue in your business. An essential aspect of your business is its accounts payable department, which deals with the cash flow related to your vendors.

This article deals with the best way to manage the accounts payable of your business so that you can enhance your efficiency and earn the most you can.

The best is automation

Automation is the best solution for making sure that you can increase your efficiency. What is automation, though? It is a simple process in which you use software to do most of your work. This means that all the manual tasks, i.e., The making of invoices, the payment procedure, and the management of invoices, are done through the same software. Administration of this system is as easy as entering a query in the software to get the required result.

This raises the question of why automation is often called the best way to manage your accounts payable department. The answer is quite simple; it reduces the risk of errors due to human influence. A small mistake in the accounts payable department of a business can have huge implications on the margins of a business. For example, a simple duplication can (and has) cost a company millions of dollars. Reducing this error margin is very simple with automation, and it is done in the same.

Invoice organization

This option helps you maintain your invoices so that you don’t mismanage them. There are various ways to organize your invoices to manage them properly. These include thorough scrutiny of your invoices to make sure that none of them is duplicated, a complete check to make sure the details of the vendors are accurate and valid, or the entry of the invoice into software that automatically validates it. These ways need to be used to ensure the best security for your invoices.

You need to have timely and accurate payments to ensure that your business runs smoothly. To ensure the same, you need to have good management of your invoices, and until you do that, there is no way to guarantee the system’s efficiency.

Use KPIs and streamline workflow

KPIs or key performance indicators (as the name suggests) are goals that you need to set up for your business to ensure that certain short-term plans can be achieved. Until you set up KPIs for your company, there is no way to quantify the progress you made, which does not seem important but is necessary if you want to see how much your business has developed. Some indicators of achievement of KPIs are the specific metrics of your business like the cost per invoice, the payment discount per order, and how soon you can pay off all your dues.

To achieve these goals, you need to streamline your workflow. What does streamlining mean? It means that all your workflow tasks are managed in a standardized way to minimize errors. These bottlenecks are identified and eliminated by simplifying, and finding a way to do so is very important for your business.

Detect fraud quickly

Fraud detection is an essential part of the accounts payable department of your business. Unfortunately, fraud is a widespread occurrence, however unethical and illegal it may be. There are various ways to detect fraud in your business. It would help if you made sure that the vendor you are sending money to has the proper credentials. While cross-checking the payment details and the certificates is one of the primary ways to deal with fraud (and identify it at the right time), you need to be careful of ṣyour money no matter who you are sending it.

Standardize payments

Standardization is one of the best ways, if not the best, to manage your business most efficiently. Payments are the part of the business that the accounts payable department deals with. Hence its standardization is essential. Once you standardize the payment process, it is straightforward to gain greater control over your capital, check how much money you spend on a particular vendor, and how much more or less you need to pay on your suppliers and vendors.

Conclusion

In conclusion, you need to make sure that your business is working in the most efficient way possible. The best way to do so is to make sure that all the departments of your business are working in the best way possible; the accounts payable department is no exception. Hopefully, this article gave you an insight into how you can increase the efficiency of your business through the AP department.

What is Dynamic Discounting?

by Richard Pollina | Mar 24, 2022 | Accounts Payable

Dynamic discounting is an early payment process that benefits both ends of the supply chain, i.e., the supplier and the buyer.

Which buyer does not love discounts? Most of the discounts usually benefit the buyer. Have you heard of a discounting system that helps the supplier and the buyer? Dynamic discounting is one such system of discounts. Let us look at dynamic discounting, its process, and how it benefits both the supplier and buyer.

What is dynamic discounting?

Dynamic discounting is a system where a supplier offers discounts to a buyer depending on the payment dates. Dynamic discounting is a method of early payment wherein the buyer pays the supplier in advance before the agreed-upon dates in return for a discount on the invoice.

The discount is dynamic because it reduces as the invoice nears maturity under the original conditions. The “dynamic” aspect refers to the ability to alter discounts based on the dates when the supplier gets paid by the buyer.

To give you an idea, let’s assume that a supplier and a buyer have agreed upon an original payment term of 60 days. As per the dynamic discount conditions, if the buyer pays the supplier on day 20, the buyer would get a 3% discount. The buyer would get a 2% discount on day 40 and no discount on day 60.

What is the process behind dynamic discounting?

1. The buyer buys services or products from the supplier.
2. The invoice is uploaded to the dynamic discounting platform by the supplier.
3. The invoice is approved for payment by the buyer.
4. The supplier considers the discounts available for a variety of payment dates.
5. When the buyer and supplier mutually agree to the rates of discounts on various dates, the discounts are automatically applied when early payment is made.

What are the benefits of dynamic discounting?

Suppliers and buyers are the two types of people who benefit from dynamic discounting. Let us look at how dynamic discounting benefits both the suppliers and buyers in a supply chain.

Supplier benefits

1. Suppliers can control when and which of their authorized invoices are paid and the percentage of discount they get.
2. It offers suppliers fast and straightforward access to cash, which boosts supplier relationships and the financial supply chain.
3. Dynamic discounting enables more accurate working capital forecasts and growth planning.
4. Suppliers who use dynamic discounting receive access to capital at a cheaper cost than other choices accessible to them, allowing them to handle unforeseen expenditures or invest in development and creativity.
5. Using the versatile, dynamic discounting model, suppliers can finance a single invoice, multiple invoices, or every invoice.
6. Instead of 1, 2, or 3 months dynamic discounting allows suppliers to receive money in a few days.
7. Increasing working capital through early payments from buyers is usually more significant than higher profits, especially for smaller suppliers, as it is critical to their long-term operations.
8. Suppliers can enhance their cash conversion cycle by obtaining early payment, which reduces their days’ sales outstanding (DSO).
9. With complete integration between two ERP systems, the supplier can gain an advantage with buyer-side transparency of received invoices. They can even employ integrated settlement advice as value addition in their payment dashboard.

Buyer benefits

1. Buyers can save millions by utilizing invoice discounts to pay less for products and services. The saved money can be invested for a higher return on investment.
2. Offering early payment to consumers strengthens the supply chain for the buyer and decreases the probability of disturbances.
3. Buyers are essentially investing their own money with dynamic discounting to get discounts. These convert into risk-free profits that are typically higher than the conventional investment gains.
4. Dynamic discounting enables buyers to reimburse their suppliers in advance in return for a discount, allowing buyers to profit from double-digit, risk-free profits.
5. Dynamic discounting increases the working capital of the sellers by giving choices for quick, versatile, and predictable access to cash. As a result, more sellers are motivated to do business with buyers, increasing the strength of the supply chain.
6. Buyers gain a working capital advantage from sellers who do not settle for early payments when combined with a payment terms extension.
7. When suppliers are given early payment and accessibility to a user-friendly system, buyers can improve their relationships.
8. Buyers minimize the cost of the goods and services they acquire by leveraging the early payment discounts improving procurement KPIs.

Final thoughts

The usage of dynamic discounting is on the rise because both the buyer and supplier benefit from it. A buyer and supplier partner use a dynamic discounting system to produce a fair, mutually advantageous partnership. It can also enhance the buyer-supplier relationship by increasing credibility.