Are you missing out on millions?
Early payment discounts can mean big savings for your organization. A standard 2 percent 10 invoice discount (the buyer receives 2 percent off for paying within ten days) means you see an annual 20 to 36 percent cash return.
What this means is if you have a $100 invoice due in 30 or 45 days and pay $98 in ten days, you accelerated your cash by 20 days, which represents 36 percent annualized for a 30-day invoice term or 20 percent annualized for a 45-day term. In most cases, this is a better return than putting $100 into a short-term fund like a money market account for 20 days, where your annualized return is typically 1 to 3 percent.
In fact, when an organization has a broad discount management program, that can be the single biggest way that accounts payable impacts the bottom line, says David Hay, former director of shared services for Hewlett-Packard who also worked on the General Electric Capital Initiative. While working with GE, his organization's goal was to secure discounts for 50 percent of all incoming invoices, which represented $200 million saved each year.
The benefits of capturing early payment discounts are clear. In addition to saving money and improving cash flow, paying early can help strengthen vendor relationships. Despite the advantages, TAPN benchmark data reveals that less than half of organizations (37 percent) actively pursue early payment discounts, with only 15 percent including discounts as part of their standard terms and conditions.
For the two-thirds of organizations not yet pursuing early payment discounts, the following guide features several technologies and proven practices that can help get you started and links to where you can find help implementing them.
The key to capturing early payment discounts is the ability to approve and pay invoices quickly. This is almost impossible if invoices are being sent directly to individual business units. When suppliers send invoices to the original purchaser it slows the process and leads to numerous lost or unpaid invoices. Between 7.5 and 8 percent of invoices sent to business units end up being lost, Hay says.
He adds that it typically takes more than 20 days to process and approve an invoice when it is sent to the purchaser, well outside the typical discount standard of 10 days. However, once invoices are in AP, a majority of organizations can approve them within a week.
"Centralization allows you to do that because your vendors are not dealing with five different departments now," he says. "They are now sending all the invoices to one location."
Paper will forever be a menace to discount capture. When routing paper invoices around (especially in a decentralized environment), it can take as much as 40 days to get approval. Problems include lost invoices, multiple copies floating around, and invoices sitting on an approver's desk untouched for days.
Thanks to capabilities such as automatic three-way matching and automated workflow with reminders and escalations – automated notifications that move invoices through the approval queue after a period of inactivity – business processing outsourcer Symcor recently implemented a workflow system and saw their turnaround shrink from 20 days to less than a week.
A chief benefit of automated workflow for discount capture is increased visibility into the approval process. Users can log into their workflow engine and see a real-time view of where each invoice is in the process, allowing them to see which ones are about to age beyond the discount threshold.
"You can see how many invoices are in each queue, how many invoices were rejected, and how many are nearing the discount date," says Nick Sprau, Vice President of Marketing for document management provider Metafile. "The documents can all be pushed through and the discounts claimed without a lot of tedious work in AP."
If imaging makes it easier to capture offered discounts, then electronic invoicing turns it into child's play. According to Hay, fully electronic invoices (files transmitted directly into your accounting system, not emailed PDF attachments) can be fully processed in three days or less, thanks to eliminating the need to handle paper in the mailroom or to scan and key the documents.
Tracey Bryant, AP manager for carpet manufacturer Mohawk industries, says e-invoicing improved their ability to capture discounts. "Our standard invoice terms are 45 days, so we don't usually have to process invoices too quickly," she says. "Ten days comes around a lot faster than 45. We have to pay extra attention to our discount vendors' invoices, but the process is much easier now that we are doing it electronically."
It's not just improved cycle time that makes e-invoicing ideal for discount capture, but also the collaborative nature of many e-invoicing systems. The same functionality that allows buyers and vendors to trade purchase orders and invoices electronically can also be used to propose discounts through a process called dynamic discounting.
Dynamic discounting refers to functionality offered by a variety of automation providers. Essentially, it involves buyers proposing invoice discounts to their vendors via web portals. What's unique about these discounts is that they are on a sliding scale, meaning that the discount amount decreases a little each day as the term due date approaches. Dynamic discounts can be proposed via most collaborative procure-to-pay system, including many e-invoicing systems.
While each of the above processes and technologies helps improve your invoice cycle time, you must also ensure that vendors receive your payments within discount terms. This means electronic payments.
ACH transactions give buyers improved control over payment timing compared to paper checks. Unlike checks, ACH payments can be scheduled days or weeks in advance and typically clear within two business days. If an invoice must be paid on a particular day to capture a discount, scheduling an ACH guarantees payment will be received on time.
Similarly, purchasing cards give buyers the same control over payment timing as ACH, but also allow organizations to hold onto their cash beyond the invoice due date. While it seems p-cards are the ideal payment tool for capturing discounts, vendors will typically only accept one or the other, not both. Merchants that accept p-cards must also pay a 1 to 3 percent interchange fee to the card provider.
However, depending on your situation, it might make more sense to pursue using p-cards instead of discounts for some vendors. When paying invoices via p-card, you are not responsible for paying the amount until you receive your monthly statement. You can maximize DPO without affecting your vendor's DSO.
The ability to capture discounts means very little if your suppliers are not offering them. Getting vendors to offer invoice discounts means convincing them that receiving less for their invoices is a better investment than waiting 30 or 45 days for the full amount.
"They should accept the discount because they are getting their cash sooner," says Judy Bicking, former global accounts payable director for Johnson & Johnson. "The two percent they are giving up isn't anything compared to getting their cash in ten days. Financially it's a smarter move."
However, Bicking says that many salespeople working for vendors fail to understand the cash management benefits of getting paid 20 or more days earlier and are hesitant to offer early payment discounts.
"If they understand it, they'll typically do it," she says. "When I'm talking to a salesperson, the first thing I do is tell them that I don't want them to make the decision right now. I'll then talk to their controller or accountant. Usually the salesperson will come back and accept the discount because they have a math person telling them that it's a good idea."
Also, work with your purchasing department so that they can propose early payment discounts to suppliers when negotiating contracts.
Regardless of your organization's level of automation, there are steps you can take to make capturing early payment discounts easier. If you are a paper-based, centralize. If you're centralized, implement scanning and e-invoicing. If your invoice process is fully electronic, consider electronic payments. And, in each situation, be sure to actively engage your vendors and demonstrate that discounts actually benefit them too.
"Discounts are one of the biggest returns you can get," Hay say. "The return is even greater than process cost savings. If you can get 2 percent net 10 from 50 percent of your suppliers, that runs into the millions. And until you consolidate and automate, you can never do that."
