Seeking greater returns on your working capital? Don’t overlook early payment discounts for bottom line benefits
Tuesday, 9 Jun 2015
Summer is a time for a fresh approach, so it is perhaps no surprise that many conversations I’ve had recently have been around ‘spring cleaning’ in the finance department during the summer months.
CEO, Basware Corporation
Customers worldwide are taking the opportunity to review existing processes and make changes that will continue to help them scale efficiently and compete effectively.
One major factor this month that had an impact on financial decisions was the UK Government Election. This resulted in the Conservative party taking a majority control of government, putting an end to uncertainty in global financial markets and unleashing a flurry of market activity. The FTSE 100 jumped 1.6% to 7,000 points, only just below its previous record high the previous month.
As Spring cleaning allows us to get rid of the old and bring in the new, this is a sensible time to consider investing in your financial supply chain. Previously, my colleague highlighted why financing in the supply chain is in everybody’s best interests and now there are even more reasons to consider doing so.
We’ve established that early payment discounting and dynamic invoicing/payments can save a company large sums of money, so now it is important to explore how companies can go about investing in their financial supply chain.
As interest rates remain low throughout the eurozone in particular – and negative in some banks in Switzerland and Germany – there is little incentive to store money in banks. Those with working capital need to look for something else. A way to use their resources that benefits the business.
The answer could be to invest in their own financial processes. Can the workflow of invoices and payments be in a way that positive cash flow can be applied to gain a greater bottom line benefit?
The execution, funding and timing of payments can be orchestrated to benefit the buyer in a number of ways. The discounts that can be achieved through early payments, for example, can take advantage of working capital and the existence of negative or low interest rates.
I see more businesses moving towards this model. Longer payment terms are often a symptom of companies guarding their capital, taking advantage of interest rates or other investments to work it in the most profitable way. But these investment options are dwindling. Early payment discounts lower operating costs, which will become the most appealing application of working capital.
Basware Discount is an alternative funding option that allows early payments to boost working capital. Suppliers get better control over their receivables, boost their cash flows and lower their Days Sales Outstanding (DSO).
There are, I’m sure, other options for investing in the financial supply chain, and I welcome insights using this forum to share them. The decisions and changes companies make now will reap rewards over many months to come.