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?
The buyer buys services or products from the supplier.
The invoice is uploaded to the dynamic discounting platform by the supplier.
The invoice is approved for payment by the buyer.
The supplier considers the discounts available for a variety of payment dates.
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
Suppliers can control when and which of their authorized invoices are paid and the percentage of discount they get.
It offers suppliers fast and straightforward access to cash, which boosts supplier relationships and the financial supply chain.
Dynamic discounting enables more accurate working capital forecasts and growth planning.
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.
Using the versatile, dynamic discounting model, suppliers can finance a single invoice, multiple invoices, or every invoice.
Instead of 1, 2, or 3 months dynamic discounting allows suppliers to receive money in a few days.
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.
Suppliers can enhance their cash conversion cycle by obtaining early payment, which reduces their days’ sales outstanding (DSO).
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
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.
Offering early payment to consumers strengthens the supply chain for the buyer and decreases the probability of disturbances.
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.
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.
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.
Buyers gain a working capital advantage from sellers who do not settle for early payments when combined with a payment terms extension.
When suppliers are given early payment and accessibility to a user-friendly system, buyers can improve their relationships.
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.
You will have multiple vendors to do business with as a business, and their numbers will grow up as you expand. While it may be easy to manage them initially, managing vendors and their relevant information are bound to get more and more complex with time. In such a case, you need advanced strategies and management tools to help you manage all your vendor information.
Thankfully, in this era of modern technological influence, you will have enough aids and tools that can help you manage your vendor information better. With such assistance, your vendor management is bound to improve. With that in mind, in this article, we will take you on a guided tour on everything about vendor management — what it is and what are the benefits it carries. So then, without further ado, let us get started!
What Is Vendor Management?
To begin with, let us first understand what vendor management is. In simple words, vendor management is the process that allows a company to take appropriate measures to manage various vendor-related data in a way that will enable the following:
Managing budgets and funds
Reducing vendor-related risks
Ensuring excellent deliverables from vendors
Maintaining the quality of service from vendors
In short, vendor management helps improve your relationships with vendors and suppliers for the long run to enjoy a fruitful relationship mutually.
Vendor management is a long and complex process that involves various stages and procedures. Let us outline the main few steps for you here:
Identifying your business targets and goals
Creating an RFP (Requests For Proposal) and defining projects
Shortlisting and identifying worthy vendors and suppliers
Evaluating numerous vendors, including specifications of deliverables and risk factors
Deciding on selected vendors
Negotiating and writing the contracts
Managing relationships and evaluating performances
Making timely payments
Evaluation and improvement of relationships
How Can Vendor Management Be Beneficial?
Now that we have come to understand vendor management, let us now move on to understanding how vendor management can benefit your business. If you are a small business owner, you must be wondering why vendor management is not that big of a deal for your business.
However, that is not true. Your business may be small now, but it will expand in the future. Also, you will consistently keep up your business with your suppliers. What vendor management does is help you refine your relationship with your vendors for the longest run. This can only benefit your business in all positive ways.
Here are a few significant benefits that vendor management offers you that businesses should consider.
It helps you single out the best suppliers
As we mentioned earlier, the vendor management process includes various steps that help you shortlist, assess, and write a contract with the vendors that will offer you value for money.
In other words, vendor management helps you to go through available vendors and suppliers in your area carefully and enables you to select the vendors that you can trust and will be able to meet your expectations.
Enhances performance management
You need not worry too much about performance when you have the right vendors on board. Yet, the vendor management process allows you to regularly and consistently maintain an overall view of all your vendors, their statuses, and their performances.
Through this, you can keep an eye on how things are going with individual suppliers. If supplier performance is not well, you can renegotiate or end the contract, thus increasing the efficiency of your company.
Reduces issues with contract management
Establishing formal contracts is a crucial factor that businesses must be careful about. But when you have more than a few vendors, it can get a bit difficult to manage contracts, bringing in problems and increasing risk chances.
However, with vendor management in place, you can easily have an overall view of all contract status and other related information. This will help enhance decision-making based on insightful data. Thus, your business can benefit from avoiding vendor-related risks while saving time.
Improve vendor relationships
Last but not least, as we have already mentioned before, having a sound vendor management system in place can help you keep up and improve your vendor relationships for the long run. The better you manage your relationship with vendors, the higher your chances of completing your projects successfully.
While some vendors may be what you expected them to be, others may fall short of your expectations. What vendor management does is help you realize which vendor is worth your time and help maintain that relationship for a long time.
Conclusion
In this era of technology, vendor management has become much easier with appropriate tools like vendor management systems and software. According to surveys, the utilization and application of vendor management software are to steadily increase by over 13% in the coming few years.
Suppose you wish to improve and manage your relationship with your vendors better. In that case, we advise you to look for a vendor management system that meets your expectations and enhances our relationship with your vendors.
Invoices are slips that tell you who is to be paid and when they expect that payment. Invoices that you issue make sure that you are paid within the given time. However, if you feel that your buyers don’t pay you on time or you need the payments to be done sooner, here are a few ways you can do so.
This article will compare the problems associated with invoice payment and how you can solve them or expect your clients to solve them.
Miscommunication and Errors
Most of the invoices are prepared manually. Sometimes, there can be problems associated with the invoice due to a lack of time and care. The vendor later has to face difficulties in the process. This increases the price and involves a lot of time too. This can also have a lot of errors in the invoice when prepared manually.
There is an easy solution to all this. If the errors are happening manually, you can digitize the entire system. This can be a bit hard with pre-established companies, so another way can be to clear out the terms and conditions so that your clients can understand them easily. Digitization won’t just help clarify the invoice and speed up the process but will also save you a lot of time and money. It will be like killing two birds with one stone.
The Time Taken to Create the Invoice
The sooner you prepare the invoice, the sooner you will get the payment. However, even after a certain invoice is created, a huge margin of errors can occur in the creation of the invoice. This time taken to rectify all the errors is called the reviewing period, and you need to cut down on it to create a better invoice. So the question is, how can you cut down on the reviewing time of your company? Here’s how.
The very first solution that comes to mind is digitization. Digitization will make sure that the errors in the invoice are minimal and hence need a low or no reviewing period. This ensures that you can invoice immediately and get the payment quicker. The second way is to make simple invoices: the simpler the invoices, the fewer errors, and the lesser the review period.
The Mode of Payment
Not every buyer you have will be able to pay you the way you tell them to without taking some time. If you want to eliminate this constraint of not paying via their preferred mode of payment, the solution is quite simple. You can accept all payment methods, whether it is through cash, DD, cheque, or online bank transfer. This will increase the number of ways to receive your payment (which can be a hassle to check) and increase the number of customers you will retain.
You can also allow automatic payments. This means that you will specify the date and time you require the buyer to pay you, and they can do so without even lifting a finger. Their software can easily make the payment without them even remembering that they have an invoice to be paid out. This is a blessing for all buyers who have automated their AP workflow process.
Lack of Incentives
One big reason you might not be getting paid earlier than you expect is the severe lack of incentives. You might be thinking to yourself why you need to provide incentives to get the money. The reason is simple; your clients might feel more motivated if they see a slight discount (not much, just 1 or 2%) if they pay the invoice before a certain number of days. This is called dynamic discounting, and it is the best incentive you can give your buyers.
You can also go the other direction and impose a late fee if the invoice is paid late. You might already have such an imposition, but you can also increase the late payments to ensure that your clients pay on time. You also need to follow up on late fees, though. There can be some trouble on the client’s side that you might need to clarify to make the payment. It is the money you need to receive, so you might need to work a bit for it.
Conclusion
In conclusion, if you want your money to be paid on time, there are a lot of steps that can be taken to ensure the same. First, of course, you need to take action and choose whether you want to get paid early or let things rest easy as they are, but if you are reading this article, you probably want the former. Hopefully, you gained something from this article to apply to your company.
In the market of today, money and trust are everything. The world runs on money, and people run on trust. Large companies have a lot of cash to influence the market, but what about medium-sized and small corporations? Are they supposed to sit back while other companies enjoy discounts in bulk?
There’s a way to leverage your supply chain to get dynamic discounts which such companies can go for to make the most of their money. Read this article to know more about leveraging dynamic discounts with your vendors.
What does leveraging supply chain mean?
Leveraging means using something to your advantage. In terms of the supply chain, it means using economies of scale (how cheap or costly an item is when it is bought in bulk) to your advantage. This may include increasing the number of items you order at a time, ensuring that all sales the supplier makes to you are final, converting all (or most) of your supplies to orders, and making timely payments.
Making sure you do so makes sure that both parties (you and your vendor) make the most of the supplies that are being provided to you. If you earn more money, you’ll be able to buy more supplies or invest in better supplies. Economies of scale are significant in a supply chain; understanding them is the key to success in your business. There are various advantages to leveraging your supply chain; for one, you’ll be able to get better discounts. Let’s look at these advantages in detail now.
How is it advantageous?
Leveraging your supply chain has various advantages in the long run for your company. Especially if you are dealing with many supplies, your supply chain is the main area of your business. Here are a few of them listed out:
It standardizes the discount rates. If you are ordering from the same supplier multiple times, it is possible to get the rates at which you buy your supplies constant. This way, you can decide your inventory efficiently and do not need to haggle too much with your vendor.
You can divide your working capital between large suppliers (which provide most of your supplies) and niche ones (which are not as big but provide you with products you can’t procure from elsewhere). This balance is reasonably necessary if you are looking to do successful business.
You can get more value for less money. If you order in bulk, the cost of the goods goes down. For example, if you are ordering 50 samples of a product, you might be getting them at Rs. 10 per sample, but if you are ordering 100 samples, you might be getting them at Rs. 8 per sample. When this slight difference in the price of one product exemplifies over huge sample space, the discount rate is enormous.
What is dynamic discounting?
Dynamic discounting is a way of leveraging the supply chain by making early payments and getting the vendor to give you a discount on what they are selling. This has a lot of advantages in the current market as it allows small and medium businesses a fighting chance against the big fish. This is why dynamic discounts are gaining popularity nowadays; they are gaining traction in this age of startups and growing industries.
This is a risk-free return for the cash the buyers save, helping them invest the money in their business or investing it in another part of the business. This allows the community to grow and the businesses to flourish, so dynamic discounting is one of the most well-accepted cultures in today’s market. If you are a budding startup, you too can leverage your supply chain in such a fashion that your supplier gives you discounts, and you can use that budget elsewhere or in research and development.
The future of dynamic discounting
Dynamic discounting and leveraging the supply chain have a bright future. With startups emerging left and right, there has been a massive boom in all industries, where there is an appropriate market to sell anything, but not the right conditions to acquire the raw materials or make the products. To cross this hurdle, a proper supply chain is required that lets the company overhaul any troubles it is facing and move towards success.
Leveraging the supply chain does precisely that; it provides the right opportunity to people who need it the most. It gives all the small and medium businesses a chance to thrive in this competitive market which is dominated by large corporations with all the money. Dynamic discounting is a much more flexible way to do deals; once it catches on, it is sure to become the next best way to make any deal.
Meet the voices behind Next Gen Digital Transformation Podcast: Tom and Rick! In this episode, you will hear about their credentials in the consulting and corporate world, along with what they’re doing at oAppsNET and future topics for episodes! Get to know your host and be on the lookout for much more!
