Early pay discounts are an often-ignored source of solid bottom-line growth. Savvy CFOs and accounts payable managers are emerging as a new kind of portfolio manager, earning annualized returns of up to 36 percent on cash, just by paying bills earlier.
By using electronic settlement networks and implementing powerful core AP, or accounts payable, practices, businesses are turning their AP operations into profit centers — and having a big impact on bottom line earnings and working capital.
» Put an electronic settlement infrastructure in place. First, AP needs to add a level of speed and visibility into the settlement process. Web-based business networks like Xign make it easy to extend an existing financial system with little or no IT involvement.
Once an electronic settlement network is deployed, AP can process and pay electronic invoices in days compared to weeks or months. With paper-based systems, Fortune 1000 companies might capture 2 percent 10 net 30 discounts 20 percent of the time. Organizations that settle B2B transactions electronically can capture 4 percent 3 net 30 discounts 90 percent of the time.
» Proactively recruit suppliers.Don’t wait for suppliers to offer early pay discounts — recruit them. Improving cash collections through discounts can be mission-critical for suppliers. One Fortune 500 company, after implementing an electronic settlement network, was able to increase supplier participation in its early payment discount program by a factor of 16 and increase discounted spend by five times.
» Segment your suppliers for maximum impact. Non-strategic suppliers (small to mid-size suppliers) represent a smaller portion of a company’s total spend, but they are also the hungriest for cash. Xign’s recent survey showed that customers were able to secure discounts of up to 4 percent from these vendors for paying in three days as opposed to 30 — an annualized return of 54 percent.
» Set the right metrics and promote your value. The key to any company initiative is to set the right metrics and promote performance. With an automated system, it’s easy to set and track metrics. But most importantly, metrics need to go beyond traditional “processing”-related numbers to more important “bottom-line” statistics — impact on earnings, cash return and working capital.
Tom Glassanos is president and CEO at business settlement network provider Xign, Pleasanton.