Flush with cash: Should dynamic discounting be part of your investment strategy?

You are one of the large global corporates that has seen your cash grow tremendously from just a few quarters ago — maybe due to drawing on revolvers or tapping the bond market combined with conserving cash initiatives due to the coronavirus crisis. S&P Market Intelligence shows cash increased 14% in Quarter 1 for S&P 500 non-financials (see chart below). Or maybe you are outside the global corporates and you are still sitting on a mountain of cash — $100 million, $300 million or more, earning paltry returns on Treasuries and bank deposits. Perhaps you are already running some form of early pay program where you offer some suppliers early payment for a 2%/net 45 discount, or something like that.

But where do you turn if you want to significantly ramp up a program to all your suppliers, whether it’s because you are concerned about impending supplier insolvencies, or you want to lower costs in the supply chain, or your Treasury is tired of getting 15 basis points on Treasuries or bank deposits. Or maybe all three. Or perhaps you want to manage your reputation and look like a good corporate citizen.

Regardless, one of the chief problems that cash-rich Treasurers are having is determining how to increase returns GIVEN current policy restrictions for the types of investments that can be made. What if you invest the cash into higher yielding assets? There are a lot of things you can do. What risk are you willing to take on? Do you want BB- bonds for higher yield? What are your restrictions for the types of investments that can be made? What type of illiquidity can you live with?

One option is to broaden self-funding to all your suppliers with an early pay program. While we have been talking about dynamic discounting since the days of Xign (and that’s been a long time, at least 15 years), the reality is there are not many options when it comes to putting together a corporate program for all suppliers using the corporates’ own money. I can name the vendors on one hand that offer platforms to enable self-funded programs.

So say you’re in a position to significantly ramp up a program because A) you have the cash, and B) you have the CFO/Treasurer’s green light. But you are feeling a bit overwhelmed having to try and figure out to roll out something to 1,000, 10,000 or 50,000 suppliers. Most importantly, your executive management thinks this is relatively easy — we’re just paying suppliers earlier, less a discount, right?

What do you do? Short of calling xyz vendor or your banker, here are a few things to consider:

Are you able to process invoices quickly today? The single biggest issue for many companies is being able to have the technology to receive, process, match, handle exceptions and approve invoices in a timely manner relative to payment terms.

Cannibalization — Many companies have been running some static discounting program for years. You approve an invoice and offer immediate payment or payment of some form of 2%/net 45 to select or all suppliers. By implementing a systemwide static or sliding scale program supplierwide, how does that impact current programs running?

Payment Term optimization — Are you looking to extend terms as part of this exercise, to provide the stick while you implement the carrot?

Technology — What type of technology do you need to scale a program and can you build it in-house using the latest coding (like low code/no code) or do you need to use a vendor’s platform?

Gainshare or subscription: Assuming a third party, does the vendor add “process” value in addition to this solution or are they purely providing the platform to discount invoices early? By adding process value, I mean vendors that play in the AP automation or e-invoicing space — see Spend Matters’ SolutionMap for examples of vendors in AP Automation and Invoice-to-Pay (I2P).

Hybrid Model — Assuming you have the cash to fund a program (and why not, you have to pay these suppliers anyway in 45, 60 or more days), do you need some insurance in case you are not able to meet early pay demands sometime in the future? Should you combine your self-funded program with another funder? And how do you do this — do you have no automated ability to switch between self-funded and third party or is it manual?

Enablement Services — What enablement support does the vendor offer? How much on-going support is necessary to maximize the program benefits for all? Remember, most vendors outside of a very few are process and technology companies, not finance shops. So understanding options about fully outsourced managed programs to basic enablement services is critical.

These are just a few of the questions to ask. We haven’t even gotten into the economics yet of pricing and analytics.

In all my years covering this space, it’s important to note you are creating demand versus fulfilling demand. The decision for a supplier to take money early at a discount is a binary one — yes or no. Certainly, today there is a serious need by many suppliers to have cash now. Also, many large companies recognize times will only get worse as insolvencies lag the pandemic. But thinking this through is not trivial if you want to manage executive management’s expectations.

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at) globalbanking.com.