You don’t train for a marathon in one day. Why then would you take this same approach to reducing costs in accounts payable? Discounting in the AP department takes planning and practice.
Here’s how your AP department can go from walking to sprinting in the race for discounts.
“It never hurts to ask.” So ask each and every supplier for available discounts. You may be surprised by how much you could save.
Use this formula to calculate the effective annual rate of return on supplier discounts:
`("Discount") / (100% - "Discount")xx("Total Period")/("Days Saved")`
Here’s an example illustrating a 2% 10 Net 30 term (2% discount if paid within 30 day):
`(296) / (100% - 296)xx(365)/(30-10) = 37.2%`
Dynamic discounting—the next frontier. Instead of accepting static net 30 terms, dynamic discounting allows discounts on a sliding scale. This means that a discount of 1.04% may be granted for payment received on the 8th day, 1.03% on the 9th day, 1.02% on the 10th day, and so on.
Dynamic discounting is a more fluid way of discounting than fixed discounting terms. Plus the discounting window is open for much longer, instead of being closed shut on the 31st day—as is the case with net 30 terms.
Accounts payable is better able to take advantage of dynamic discounting with an automated payments workflow.
Putting it all together: Electronic Invoice Payment and Presentation (EIPP)
Electronic Invoice Presentment and Payment is an entirely electronic and self-contained procure to pay solution.
Suppliers send an electronic invoice by logging onto the organization's AP portal. Once uploaded, the invoice is matched against its originating PO. AP staff no longer requires manual invoicing processing; rather the invoice is pushed to payment once approved.
Payment, then, is transmitted electronically—either by ACH, wire or card—within the EIPP platform.
The effect of EIPP is faster payment workflow execution than conventional means. This makes organizations privy to the full range of discounting options available from suppliers.
Aim for EIPP in your race towards discounting.
Even if you fall short of this goal, your AP department will cross the finish line with some savings.
About the Author
Chris Doxey, CAPP, CCSA, CICA is an independent management consultant providing Internal Controls and Business Process Best Practice Solutions. She has extensive experience in procurement, accounts payable, internal auditing, internal controls, Sarbanes-Oxley compliance, payroll, logistics, financial systems strategy, and financial integration at Digital, Compaq, Hewlett Packard, MCI, APEX Analytix, and Business Strategy, Inc. She was recruited to assist MCI (formally WorldCom) recover from their internal control challenges. She has a bachelor's degree in English, a bachelor's in accounting, a master's in business administration, and a graduate certificate in project management. Chris has written numerous articles and published two handbooks: AP Leadership Skills and Implementing a Controls Self Assessment Program for Your Accounts Payable Department.More Content by Chris Doxey