Kurtz’s Korner: Dynamic Discounting – Collaborative Cash Flow
Since the fall of 2008, like you, I’ve been reading about corporations extending payment terms on their suppliers while holding record levels of cash. As a result, small and medium sized businesses (“SMBs”) have struggled with the effects and costs of being paid later and later. Last week, a Wall Street Journal article really brought home to me the impact of this extended payment term trend on SMBs and made me think about how Ariba is helping both Buyers and Sellers collaborate on their cash strategies and cash flow needs.
The owner of one SMB studied in the article has been forced to dip into an expensive line of credit and stated, “You're collecting a lot slower than you're paying out, so it stunts your growth.” While another was forced to lay off 16 employees due to cash flow problems caused by late-paid invoices.
Contrast that to the experience of Ariba supplier Mediafly, who was able to dynamically accelerate their payment from their customer via the Ariba Network when they needed it to increase production and thus accelerate the growth of their business. On the other side of that transaction, their customer (a large media conglomerate) was able to put some of their surplus cash to work earning a significant annual yield…far better than a <1% APR bank deposit – Now, that is collaborative commerce!
More and more buyers and suppliers are similarly taking advantage of the ability to optimize their cash flow by using the Ariba Network. By utilizing Ariba’s dynamic discounting platform (Ariba Discount Pro™) on the Ariba Network™ suppliers are accelerating cash flow & lowering Days Sales Outstanding (“DSO”); and at the same time buyers are earning greater yield on their cash & reducing risk in their supply chains.
One of the biggest misperceptions about payment term optimization programs is that Buyers think they’ll reduce their Days Payable Outstanding (“DPO”) while many organizations are trying to do the exact opposite – extend their DPO. We’ve worked with several companies to both take advantage of early payment discount opportunities and extend their DPO by benchmarking their actual payment terms (not the “standards” companies claim to have) to optimize their use of cash.
If you are not yet taking advantage of these capabilities, I encourage you to check out this presentation from Ariba Live 2012 to hear how some of our Buyer and Supplier customers (including Mediafly) are saving millions and driving growth through accelerated payments. Alternatively, you can sign up for our June 21st webinar here to learn more about how you can do the same.
Please let me know your thoughts on this topic.
Vice President and General Manager, Ariba Network and Financial Solutions