In this blog, we will explore how dynamic discounting can help buyers with their capital management. In particular, we’ll explore how buyers can reduce their COGS through early payment discounts and understanding how dynamic discounting can be a powerful tool for buyers looking to optimise their capital management strategies.
Dynamic discounting is an innovative financial solution that enables buyers to take advantage of early payment discounts offered by suppliers. By paying invoices early, buyers can reduce their cost of goods sold (COGS) and improve their cash flow and working capital.
However, dynamic discounting is not just about saving money on COGS. It also has a significant impact on a buyer’s capital management strategy, allowing them to conserve cash, invest in growth opportunities, and ultimately achieve their financial goals.
The Challenge of Capital Management for Buyers
Managing capital is a key challenge for businesses, especially in today’s competitive business environment. Organisations need to balance various priorities, such as conserving cash, optimising working capital, and investing in growth opportunities.
One of the biggest challenges buyers face is optimising working capital. Buyers need to make sure they have enough inventory and supplies on hand to meet demand. This is whilst also minimising their inventory holding costs. They also need to manage their accounts payable and receivable effectively to maintain a healthy cash flow.
Finally, there is the need to invest in growth opportunities to stay competitive and expand their business. This can include investing in new technologies, entering new markets, or acquiring other companies. However, these investments require significant capital, which can be a challenge for buyers with limited resources.
Buyers face a variety of challenges in managing their capital, including the need to conserve cash, optimise working capital, and invest in growth opportunities. Dynamic discounting can be a powerful tool for buyers to address these challenges and achieve their financial goals.
The Benefits of Dynamic Discounting for Capital Management
Dynamic discounting can provide buyers with several benefits when it comes to managing their capital. Dynamic Discounting offers a higher return on investment than traditional savings accounts. From the investment viewpoint of a company that has excess cash and wishes to have the best ROI on investment options.
Another significant benefits is the ability to save money on cost of goods sold (COGS) through early payment discounts.
Here’s how it works:
When a supplier sends an invoice to a buyer, the buyer typically has a set amount of time to pay the invoice. For example, 30, 60, or 90 days. However, many suppliers are open to offering early payment discounts to buyers who pay their invoices before the due date. For example, a supplier might offer a 2% discount if the buyer pays within 10 days instead of the standard 30 days.
Dynamic discounting enables buyers to take advantage of these early payment discounts. Buyers can upload invoices into a cloud-based Dynamic Discounting platform, where they can offer discounts in agreement to paying their invoices before the due date. This not only reduces the cost of goods sold, but also helps improve cash flow and working capital by accelerating the payment cycle.
For example, let’s say a buyer purchases $10,000 worth of goods from a supplier. Next, the supplier offers a 2% early payment discount if the invoice is paid within 10 days. If the buyer takes advantage of this discount, they would save $200 on the cost of goods sold. These savings can then be used to invest in growth opportunities or to fund other areas of the business.
Key takeaways
By using early payment discounts, buyers can reduce cost of goods sold, improve cash flow, and optimise working capital.
However, implementing a dynamic discounting program requires careful planning and execution. Buyers need to work closely with suppliers to establish mutually beneficial payment terms and ensure smooth invoicing and payment processes.
Despite the challenges, many companies have successfully implemented dynamic discounting programs and reaped the benefits. By using dynamic discounting to reduce their cost of goods sold, these companies have been able to free up cash for other investments and achieve their financial goals.
In conclusion, dynamic discounting can be a valuable tool for buyers looking to improve their capital management strategies. By partnering with the right suppliers and implementing best practices for dynamic discounting, buyers can achieve cost savings, improve cash flow, and drive growth for their businesses.
Learn more about our Buyer Dynamic Discounting solution.
About B2BE
B2BE delivers electronic supply chain solutions globally, helping organisations to better manage their supply chain processes, providing greater levels of visibility, auditability and control. We’re driven by a passion for what we do, inspired by innovation, and underpinned by a wealth of knowledge. With over 20+ years of experience, the B2BE teams operate worldwide.
For more information, visit www.b2be.com.