Driving success of an early payment program
Executives in Procurement, Accounts Payable, and Treasury are concerned suppliers would not participate in an early payment program if they made it available. Some of these concerns stem from assumptions that suppliers aren’t looking for early payments or that implementation of such a program would cause confusion between suppliers and buyers, or, more frequently, confusion among internal teams. Despite these apprehensions, suppliers have made it clear that they are looking for cost-effective tools to manage their working capital needs – especially if that process does not add debt to their balance sheet, is easy to use, and provides visibility into payment.
There are best practices to positively affect the adoption of an early payment program with suppliers.
- Know supplier fair market payment terms
By paying your suppliers more quickly than your competition, you run the risk of financing their operations at the expense of yours. Standardizing and optimizing supplier payment terms by category, or groups of spend, not only is a sound fiscal move, but one that can drive interest in an early payment program. Furthermore, many large corporations have accumulated hundreds of payment terms in their ERP. Taking time to consolidate those terms and ensure that all suppliers are being paid appropriately can significantly increase the success of a program.
- Have a communication plan
Commit to having a clear and realistic communication plan both for suppliers and internal teams. Help suppliers understand what is changing, why, and how early payments can benefit them. Internally ensure that teams are aware of process changes and spend time educating on what to expect and how to answer questions from suppliers. Remember to keep messaging clear and succinct, and always ensure you have a process in place to provide necessary support.
- One size doesn’t fit all
Large corporations often have a diverse set of suppliers ranging from small indirect suppliers to large raw material vendors. Additionally, suppliers have varying needs when it comes to cash flow, due to factors such as size, industry, access to capital, and regional complexities. Early payment options, such as Dynamic Discounting, can significantly increase program adoption as suppliers are given the ability to choose to get paid early at a prorated discount before their net payment date. Give suppliers options for early payment…one size does not fit all.
No one is arguing that change is easy. With internal alignment, planning, and organizational will, any company can implement a successful and well-adopted early payment program.
To learn more about SAP Ariba’s Discount Management and the associated working capital services, please go to:https://www.ariba.com/solutions/solutions-overview/financial-supply-chain/dynamic-discounting-and-discount-management