Tag Archives: supplier payment

Dynamic Discounting to Ease Payment Woes

A new report has highlighted that three quarters of UK businesses plan to use Dynamic Discounting to reduce supplier late payment woes.

Dynamic Discounting

Changing legislation, public and governmental pressure, and the threat of financial and reputational penalties are leading many businesses to use innovative new methods to ensure suppliers get paid more quickly/on time.

As many as three quarters of UK businesses plan to use the practice of Dynamic Discounting – offering suppliers the chance to accept a lower than invoiced price in return for speedier payment – potentially helping to overcome the endemic problem of unfavourable customer terms or late payments.

Cash Flow Issues

In research conducted among 100 UK procurement professionals, on behalf of procurement software provider Wax Digital, 27 per cent said that their business already used Dynamic Discounting with suppliers. Another 30 per cent said they plan to start doing so in the next 12 months and a further 20 per cent said they had it as a longer term objective.

It was also recently estimated that UK small and medium sized businesses are owed an average of £12,000 each in late payments, equating to £55 billion countrywide. 23 per cent have also considered insolvency as a result of late payment related cash flow issues, while 68 per cent wait for 60 days or more for payment.

The government’s recent enterprise bill is also designed to tackle the imbalance of bargaining power between suppliers and their customers.

But the trend of businesses taking up Dynamic Discounting suggests that suppliers and their customers are taking matters into their own hands. Dynamic Discounting systems work by offering a scaled discount for early payment at the point when invoices are issued to customers.

This has also become possible through the increased use of e-procurement software that automates and massively speeds up the matching and reconciling of supplier invoices on the customer side. Because many businesses can now process invoices in a matter of hours they are in a better position to pay the supplier early, should they choose to do so.

Cash in the Bank

Daniel Ball, business development director, Wax Digital, comments: “Serious late payment and cash flow issues are more likely to destroy a business of any size over and above anything else. It appears that the business community is now taking the bull by the horns to solve this growing problem while suppliers can use a different type of bargaining power.

“Although businesses may get paid slightly less for their products and services they gain the benefit of having the cash in the bank much more quickly.”

The research was commissioned by Wax Digital and conducted by Morar Consulting in early 2016.

Challenges Ahead for Buyers Making Late Payments

Few buyers are aware of changes to late payment regulations, as well as the potential penalties for making late payments to suppliers. 

Late Payments Main Image

In the modern procurement world, there are many hurdles to timely payment that exist on both sides of buyer-supplier relationship. Overcoming these, and ensuring that organisations are not making late payments, is a key way to build good relationships.

New Hackett Group research has found that nearly one-quarter of all supplier invoices are paid late (Fig. 1). Despite the working capital benefits, only a very small percentage of respondents to The Hackett Group’s Payment Practices Poll, intentionally pay suppliers late.

Fig 1: Common Reasons for Late Payments
Fig 1: Common Reasons for Late Payments

Most payments are simply delayed by slow approval processes, late receipt of invoices, or technology problems. That being said, there is a continuing trend for larger organisations to extend their payment terms, or make unilateral contract changes aimed at slowing the payment clock.

Well over half of procurement organisations surveyed by The Hackett Group were not aware of legislation and government initiatives to encourage faster payments to suppliers. Further, because it is uncommon for suppliers to charge interest or fees for late payments, 76 per cent have no plans to pay suppliers for late payments.

In general, late payments have a proportionally higher impact on smaller suppliers’ financial positions. These may be the very same companies that buyers have committed to help grow as part of their diversity and supplier development strategies.

Why is there such a large disconnect? And what needs to change?

This disconnect has become an important economic issue for several reasons. Banking regulations like Basel III have tightened bank capital requirements and financing costs, thereby reducing financing funds available for smaller companies.

There is also a belief that money unnecessarily caught up in the supply chain counteracts growth in the economy (e.g., missed business opportunities, financial distress), causing additional concern.

Given the higher risk of financial penalties being incurred for late payments, companies purchasing goods and services from SMEs need to resolve any process issues to enable a more efficient payment program.

What can buyers do to avoid late payments?

Not only do late payments cause operational issues and loss of discounts for early payment, they can also hurt relationships with suppliers and result in financial penalties due to contractual obligations and government regulations.

Buyers should start by looking internally to ensure better communications, processes, and automation around the payment process. Payment organisations can also look externally, to their suppliers, to improve the payment process.

Although buyers are ultimately the main driver, suppliers can still influence the timing of payments through the use of various strategies. Buyers should work collaboratively with suppliers to implement both internal and external changes spanning from people to process to technology.

Learn more about Hackett’s Procurement Executive Advisory Program here

Laura Gibbons is a Research Director for The Hackett Group’s Procurement Executive Advisory Program. She has industry and consulting experience in areas such as purchase-to-pay, strategic sourcing, payment strategies, manufacturing operations, economic impact analysis, and organisational and process design. You can contact her via email at: lgibbons@thehackettgroup.com.