Treasury trailblazers, get started with Dynamic Discounting

February 6, 2019
James Hayward

If you work for a company with a lot of surplus cash, you probably spend a fair amount of time figuring out what to with that it all. Bank deposits and money fund investments are nice and secure, but they’re hardly value-adding in this low-interest rate environment.

But what if there was another way? A way that not only put your company’s cash to work without taking on any more risk, but a way that also helps other departments within your organization meet their strategic objectives while supporting the company’s supply chain.

If this sounds appealing, it’s time to implement Dynamic Discounting. The solution creates a genuine win-win for your company and its supply chain. If you have surplus cash and you’re not using it, you’re missing out on a big opportunity.

What is Dynamic Discounting?

Let’s start with the basics: Dynamic Discounting is a flexible supplier financing tool that lets buyers accelerate payments by using its own cash in return for a discount on goods purchased. It’s like paying for that new TV you wanted up front and getting some money off, rather than waiting 30 days and paying full price.

It’s dynamic because the value of the discount varies depending on the date of payment. Unlike traditional static discounting, where buyers typically offer a 2% invoice discount to suppliers on invoices paid in the first 10 days, with Dynamic Discounting the earlier you pay, the greater the discount you receive.

Putting your cash to work

The headline benefit for treasury is that Dynamic Discounting allows you to earn an impressive risk-free return on your company’s surplus cash. These returns vary depending on several variables, but conservatively, Dynamic Discounting returns between 8% to 12% APR. Sometimes, it’s possible to earn returns of over 20% APR. Either way, these returns are way above the market norm in our low-interest rate environment.

Dynamic Discounting also allows you to put your company’s cash to work strategically, rather than locking it up in a bank vault. For example, you can work closely with procurement to segment suppliers and tailor the early payment options offered.

Doing so will help you maximise participation in the program, optimize returns and ensure cash is going where it’s needed—helping procurement strengthen its supplier relationships and build resilience in the supply chain. It may also allow procurement to meet cost-saving objectives because of the reduction in the cost of goods purchased.

Accounts Payable (AP) will also see a benefit. Dynamic Discounting promotes visibility between buyers and suppliers. When using the solution, suppliers can see the status of their invoices and control when they’re paid. As a result, AP should have fewer supplier enquiries to deal with and can focus their time on more value-adding tasks, something they will be thankful for.  

Create a supplier lifeline

For all the benefits your company will get from Dynamic Discounting, it’s arguably your suppliers that are the real winners. The solution gives then access to readily available, low-cost funding, meaning they don’t have to turn to expensive short-term loans to finance their working capital— this will be a welcome to relief to suppliers suffering from cash flow challenges.

In addition to short-term working capital relief, the solution also helps suppliers thrive in the long term. This is because the solution puts suppliers in more control of when they get paid, helping them forecast more accurately and better manage working capital.

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