Smart finance leaders are always looking for ways to turn their costly operational processes into value-adding - or even better - cash-generating activities. Launching an early payment programme to your suppliers can do just that. A well executed early payment programme can positively impact EBITA while also offering a value-added service to your suppliers.
You may think that pursuing a strategy of paying as late as possible while still avoiding late fees is the optimum solution - in reality you might be leaving money on the table. However, a successful early payment programme isn’t just benefitting you as the buyer but brings financial wins for your suppliers as well.
What is an early payment programme
Early payment programmes are offered by buyers to their suppliers. The buyer is offering to pay an invoice before the due date in exchange for a discount on the invoice. Suppliers benefit from getting paid fast and reducing the risk and uncertainty of late payment. Buyers benefit both from supporting the financial stability of their suppliers and earning a better return on their cash. A successful early payment programme should be a win-win for both parties.
Below, we share 8 tips that will help you make your early payment programme a success.
1 - Have enough cash in the bank
Let’s start with the most obvious but also most important point. Having sufficient liquidity in your businesses is the key to making the programme successful. Being able to consistently offer suppliers early payment options will be crucial to adoption, otherwise suppliers who rely on early payment may lose trust in the programme. Once rolled out to a larger supplier base - dozens or hundreds of suppliers - you want to offer payment options consistently.
If you do have enough excess cash, the numbers clearly support running the programme. Idle cash in your bank account earns interest of around 1% p.a. while an early payment programme can drive a risk-free return of over 8% p.a.
In short - if your working capital needs are otherwise met, capturing early payment discounts at scale can make a significant difference to your bottom line.
2 - Know your supplier segments and their needs
You will likely have both larger and smaller suppliers and may be tempted to focus on the few larger suppliers who potentially make up 80% of your spend. Often however, these larger suppliers have lots of financing options available, meaning that early payment may be less valuable to them. The suppliers who truly benefit from early payment are small and mid-sized businesses.
Smaller and growing suppliers tend to have more immediate cash requirements and are more likely to be overwhelmed with the paperwork that comes with traditional financing options. External circumstances like the liquidity challenges caused by the Covid pandemic can easily result in cash flow gaps for these suppliers. Supply chain shortages have meant that more cash is tied up in inventory or materials. Add other unexpected expenses or late paying customers to the mix and it’s not difficult to see how an early payment offer can make a significant difference to a growing business.
In summary, while you can manage payment terms and discounts with your larger suppliers on a 1:1 basis, this approach is not feasible for your broader base of suppliers. A standardised early payment programme can help you support your entire small to mid-sized supplier base with early payments.
3 - Understand potential obstacles in your process
Offering early payment is conditional to invoices being approved on time. If invoices can’t be processed and approved one or multiple weeks before the due date, your early payment programme won’t be valuable. Unfortunately, many businesses find their accounts payable processes inefficient - whether that’s due to complex approval workflows or a high volume of manually processed invoices.
As you plan your early payment programme, ensure that you identify any obstacles or bottlenecks in your process and consider optimising or digitising the handling of invoices where feasible. In fact, an early payment programme can be a great catalyst for driving efficiencies in your finance team.
4 - Take a holistic view of the supplier experience
Depending on how your organisation is structured, the end-to-end supplier experience may be in the hands of multiple functions, e.g. finance, procurement, compliance or legal. Therefore, an early payment programme should not be treated as a siloed activity but rather as an integrated initiative that can streamline your entire procure-to-pay process and create a competitively differentiated supplier experience.
For example, if you take into account the supplier journey from onboarding to payment, the introduction of a self-serve portal can offer numerous benefits beyond early payment. A self-serve portal can not only reduce the amount of manual onboarding and correspondence work for internal teams but also give suppliers visibility into upcoming payments for peace of mind even if they are not taking an early payment offer that month.
If you take a holistic approach you will identify more opportunities for efficiencies and experience improvements that can take your early payment programme from standard to exceptional.
5 - Use a dynamic over a static discounting model
To understand why dynamic discounting is superior, let’s look at the traditional option of static discounting. With static discounting you can pay suppliers early in exchange for a fixed discount. That means, there are two payment options - either you pay the discounted amount before the fixed date or you pay 100% after the fixed date. For example, a "2/10 Net 30" payment term would mean that if you pay the supplier within the first 10 days, you, as the buyer, can take a 2% discount. You only have an early payment window for the first 10 days. Dynamic discounting extends the early payment window from the time the invoice is approved, right up until the due date of the invoice. The closer to the invoice due date you make the payment, the smaller the discount.
Dynamic discounting is a more flexible and collaborative approach that provides benefits to both parties. You, as the buyer, can access savings that wouldn’t be available through static discounting. On the other hand, the supplier can access cash that they wouldn’t have access to in a static model.
6 - Find a partner with experience in your industry
As outlined in the previous points, a successful launch is dependent on the tight integration of the early payment programme with your existing processes and technology. Current supplier management, accounts payable and payment systems all need to be taken into consideration.
The technology stack, systems and complexities in the procure-to-pay process can vary widely between industries so selecting an early payment programme partner who has experience in your industry ensures you hit the ground running. Choose a partner who has a deep understanding of the ordering, invoice approval and payment practices in your industry and who integrates with your finance and procurement systems.
7 - Launch the programme as a value-added service
Approach the launch of an early payment programme with a marketing mindset. That means being intentional about the positioning, messaging and promotion of the programme. Launch the programme as part of a broader value-added service for suppliers.
As mentioned in point 4 - taking a holistic approach to the supplier experience - signing up to the programme could include additional benefits such as giving your suppliers access to a portal that gives them visibility of upcoming payments for peace of mind, even if they don’t take an early payment offer that month.
Choose an early payment programme partner who can support you with the right benefits messaging and educational content. Some suppliers may be new to this type of cash flow service so they will need information on the benefits, FAQs, automated engagement as well as a user-friendly sign-up and onboarding experience.
8 - Expect realistic participation rates
As you would expect, not all suppliers will take up early payment offers. Suppliers who have surplus cash themselves will be happy to sit tight and wait until the due date to get paid. There will also be suppliers who might take advantage of early payment occasionally, depending on their cash flow needs that month. Typically you can also expect a percentage of suppliers to opt into the service on an ongoing basis.
It’s important to focus on the supplier experience first - the smoother, more valuable and easier the experience is for suppliers, the more trust they gain and the higher your early payment uptake will be. We typically see adoption rates of 20%.
In conclusion, a carefully planned and well executed early payment programme launch to your suppliers can turn your whole procure-to-pay process into a competitive advantage - making you more efficient and profitable while supporting your suppliers with healthy cash flow when they need it most.
At Relay, we’re experts in cashflow automation - we help ambitious finance teams turn their back offices into a value-adding functions. Relay’s platform uniquely operationalises early payment incentives so you can run the programme at scale across a large supplier base without any overhead or individually negotiated discounts.
If you want to find out how to earn cashback by paying your invoices early - get in touch.