Organizations are hoarding cash in their bank accounts at unprecedented rates. In fact this year corporations have deposited 42% of their short-term cash in bank accounts compared with just 25% two years ago. Are there better options for earning higher returns and reducing supply chain risk?
In my November 18th best-practice webinar entitled Four Keys to Cash Flow Value in an Anemic Recovery, I discussed a strategy to earn high-yield risk-free returns on early payment discounts with no impact on Days Payable Outstanding (DPO). A standard discount term like a 2% 10 Net 30, for example, equates to a 36% annual rate of return. This is a high-yield return with no risk because the payable is due regardless. It’s all about the time value of money.
More organizations are paying close attention to this emerging strategy, which explains the growing interest in e-invoicing. With paper invoice processing, 70% of discounts are missed. Electronic invoicing virtually eliminates invoice exceptions and compresses the invoice processing cycles to a few days, dramatically expanding early payment discount opportunities. One Ariba customer, a sports equipment retailer, was able to increase discount capture from 30% to more than 90% of eligible invoices by moving from paper invoice processing to electronic invoicing.
Connecting buyers and suppliers over a business commerce network, like the Ariba Network, creates new “dynamic discounting” opportunities, where suppliers without standard discount terms can request payment acceleration on an approved invoice for a discount. In addition, payments can be discounted on a pro-rated sliding scale that creates a win-win for the buyer and the suppliers. The buyer gets to put it's short term cash to use and save money. The supplier gets to control payment acceleration to improve their cash flow.
Ariba calls this new way of managing cash “collaborative finance management,” where both buyers and suppliers can leverage the power of the cloud to optimize working capital. Buyers retain control over there cash used including the hurdle rate, the timing and amount of cash used. They can also control which suppliers to include in their discount program. All this is made possible through electronic invoicing.
So the answer is yes. E-Invoicing really can help you, and your suppliers, manage cash better.
To learn more about how you can leverage electronic invoicing to maximize discount capture and optimize working capital click here to download and watch the free webinar recording.
Director, Network & Collaborative Finance Management Solutions