DPO vs Early Payment Discounts – Finding the perfect balance in the conundrum

A vital measure indicative of a company’s overall financial well-being is Working Capital. Accounts Payable plays a major part in maintaining optimum levels of working capital and provides visibility into the cash flow of the organization. Since the AP department of any organization tends to be valued more as an operational contributor, it’s capabilities to aid a more efficient working capital management is side-tracked.

Two of the most common strategies used by organizations to improve their working capital are to increase their Days Payable Outstanding (DPO) or to pay early and capture discounts on early payment. Both of these strategies have their pros and cons. Increasing DPO may prove to be beneficial for the buyer but strains the relationship with the supplier since he/she gets a delayed payment. The latter strategy of paying early to increase savings and capture discounts may prove to be harmful for the liquidity in the buyer’s organization. To decide the best course of action for maintaining working capital, it is essential for the company to have complete visibility into supplier information and payments.

A survey conducted by Paystream Advisors in 2016, states that 22% respondents find missed discount opportunities to be a major problem in accounts payable and 13% state that lack of visibility is a cause for concern.  When organizations have better visibility into Supplier Information and payment terms, they will have impacted their working capital in a positive manner.

Strategies for Optimization of Working Capital

Finance perspective

Streamlining Accounts Payable operations by means of a supplier information management system to maintain, update, review and record supplier information may not just help the treasury department with the accuracy of their forecasting but can also mitigate risks, ensure compliance, reduce funding gaps and realize higher savings. Some of the key benefits include:

• Cost & Process savings – A major chunk of AP’s responsibilities is to record, maintain and update Supplier Information. A self-service SIM portal streamlines the on-boarding process, helps with document tracking, enables risk scoring, ensures compliance and provides one view of data and since the suppliers enter information about themselves, it saves the department that time and cost too.
• Process Compliance– Since automated AP processes are seamlessly linked to the Supplier portal, it’ll make it easier to detect frauds and duplication of records & payments, thereby mitigating risks. The increased visibility also gives the organization a better look into spend patterns and savings opportunities.
• Management of Supplier Payments – For a company to maintain stable levels of working capital and ensure liquidity, they will either have to increase their DPO or to capture more savings and cash-in on Early Payment Discounts. The central repository that the portal proves to be gives the management complete visibility to choose the apt course.

Supplier Perspective

The major challenges that companies face while processing payables are:

• Taking constant Supplier calls to know payment status
• Updating Supplier Data
• Extending payment terms to meet liquidity needs

With a Supplier Information Management solution, a supplier can track the statuses of their own invoices and payments in near real time, thereby reducing the need to follow up constantly. This helps overcome the first hurdle. The solution also enables the suppliers to update their information on the portal, saving an AP executive effort to re-enter supplier data. Increased visibility also gives the user a better peak into ways to extend their DPO. The fundamental value of the Supplier Portal can be gauged by looking at how it caters to the basic needs of the AP departments and helps optimise working capital management by helping companies plan their spends better.

Read our whitepaper titled “Supplier Management Information: The Key To Unlocking Working Capital” to know more about how can a Supplier Information Solution aid efficient working capital management.