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Author's profile photo Christopher Rauen

Early Payment Discounts: The No-Risk Approach to Double-Digit Cash Returns

Call accounts payable. Check your invoices. There’s gold in them thar bills.

Process your invoices over a business network and you can mine your payables for profit—something you can’t do when transactions are managed offline, on paper. When you connect to suppliers electronically, you can collaborate over payments in ways that work to the benefit of both trading partners.

In the old world of paper invoicing, it can take weeks or months to approve an invoice for payment. When you move to an electronic process, it can take a few days. The result? You capture more early payment discounts that earn double-digit cash returns, with no risk. In a networked economy, that’s a great way to manage your cash.

I discussed this opportunity in more detail in a recently published article, Managing Cash in a Networked Economy. The article is geared to the treasurer, who
often fears that expansion of early payment discounts has negative consequences for days payable outstanding (DPO).

As the article explains, though, you can have the best of two worlds: more discounts while maintaining or extending DPO. A leading electric utility, for example, was able to implement an early payment discount program and extend its DPO by two days. In addition, with dynamic, sliding-scale discounts, you can take advantage of entirely new discount opportunities up to the due date of the invoice. These are discounts that are virtually impossible to capture in a disconnected business environment.

You can also spread your reach far beyond those suppliers that have offered discounts in the past. These can include smaller suppliers that have a greater
need for cash, but can’t access bank loans or credit lines to meet their cash flow requirements. Early payment discounts become a valuable source of liquidity for them.

Considering your alternatives, early payment discounts are your best option to increase earnings on cash balances in the current low interest rate environment.

Interested in other ideas on how to benefit from the networked economy? Click here.

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