Early Payment Discounts - A Lucrative Cash Management Tool

Business settlement networks offer opportunity to deliver risk-free returns on short-term cash

December 27, 2006 — Stretching accounts payable is an old-school strategy long considered common sense cash management. The advent of "business settlement networks," which electronically process invoices and payments, is questioning this premise. By compressing the settlement cycle from weeks or months to just days, business settlement networks dramatically expand early payment discounts programs to deliver treasury managers double-digit, risk-free returns on cash.

In discussions with more than 200 Fortune 2000 companies, Xign Corporation discovered that less than 1 percent of suppliers offer discount terms today. Yet, in a recent survey of Xign Business Settlement Network suppliers, 85 percent of respondents stated a willingness to occasionally or always accept discounts for faster payment. This gap highlights one of the great earnings opportunities in corporate finance.

Business settlement networks transform financial settlement operations to bring virtually all discount opportunities within reach. This goes beyond strategic suppliers — the focus of most traditional early payment discount initiatives — to include non-strategic suppliers that may represent 80 percent of suppliers and more than 20 percent of spend. A business settlement network makes it easy to extend terms to all suppliers, reaching those hungriest for cash and willing to offer discounts as high as 4 percent 3 net 30 — a remarkable 54 percent annualized return.

Results from over $100 billion of spend processed in Xign's business settlement network show that 30 percent of suppliers on average will select discount terms if offered to them. That leaves most suppliers on net terms. With a business settlement network, even this larger group can tap discounts opportunistically by requesting early payment on any approved invoice that meets a predetermine hurdle rate set by the buyer. For one Xign energy company customer, this "dynamic discounting" approach is increasing the total discount pool by more than 30 percent.

Another Xign retailing customer found that half of its suppliers enrolling for electronic settlement selected an early payment discount program. Today these discounts are delivering a 36 percent annualized cash return, and, with no negative impact to days payable outstanding (DPO), the program is self-funding.

Of course, discounts won't apply to every supplier. Spend categories such as telecommunications, utilities, employee expenses, taxes and rent don't qualify for them. For this group, moving settlement from paper check to corporate purchasing cards provides another way to earn discounts through lucrative purchasing card rebates.

In the new world of electronic settlement, stretching payables is the road to low return. To maximize cash earnings, a comprehensive early payment discount strategy is essential. As Xign customers are discovering, these discounts drive lucrative, risk-free returns on short-term cash, improving corporate earnings with no impact on DPO.