Blogs - Finance and Accounting Services Outsourcing
| Optimize working capital through Dynamic Discounting |
| By Conor Mullaney on 6/15/2009 9:58:48 AM |
The credit crunch has led companies to consider extending their Days Payable Outstanding (DSO) in order to optimize working capital. There are different approaches that companies are adopting to maximize working capital. One innovative approach is knows as Dynamic Discounting, has been adopted by leading companies.
Dynamic Discounting is an electronic discount process proposed by either the buyer or the seller with an offer to be paid before the due date. The rate of discount is reduced each day on a pro rata basis to the original invoice due date, initiated at any point in the transaction cycle. Buyers are then able to take advantage of sliding scale discounts throughout the invoice term. The design principle is predicated upon a discount rate benefiting both parties.
However, a prerequisite to implementing Dynamic Discounting is to ensure that the entire Accounts Payable (AP) Process is automated and the invoice is free for payment. AP automation also supports such environmental initiatives as Green or Paperless Strategy. Key to AP automation is the implementation of tools such as electronic invoicing, automated workflow (invoice receipt-to-approval) and electronic payment.
As an electronic process, Dynamic Discounting requires a system which links the supplier network with the company's Accounts Payable's ERP tool (such as SAP). The rate of discount will then be triggered out of the back end of the ERP tool by the buyer, interfacing with the supplier's network to obtain the vendor's approval.
The benefits of Dynamic Discounting are experienced by both parties. From the buyer's perspective, apart from the optimization of working capital, a, higher rate of return is obtained because the interest earned on any short term investment is lower than the savings emanating a discount program.
Further, providing a discount opportunity to a seller who is hungry for cash increase the number of vendors from whom discounts are received. As a result, buyers typically achieve discounts on nearly 80 percent of discountable spend.
For a seller, lowering working capital is vital. Through Dynamic Discounting sellers can reduce their Days Sales Outstanding (DSO) and thereby have access to cheaper finance.
With the incorporation of a Dynamic Discounting Strategy, companies-both buyer and seller- can ensure a stronger balance sheet position not to mention an enhanced buyer-seller bond and a greener environment! |
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