EIPP: Cash Management on Your Terms

by Gustav Khambatta 0

The market for eInvoicing continues to grow, with recent surveys suggesting 20 – 40 percent of organizations are planning to implement invoice automation over the next three years. The key drivers are a desire for increased visibility and control, paired with a reduction in process costs and approval cycle times. However, maximum benefit only occurs when suppliers submit invoices electronically through a collaborative network, and getting suppliers to join these networks is a challenge. It shouldn’t be.

The value proposition to the supplier is primarily two-fold: reduced operating costs (e.g., no more mailing of paper invoices) and the promise of getting paid on time — or even sooner, by agreeing to an early pay discount term.
For the buyer, such early pay discounts are more achievable than ever, thanks to the fast and efficient processing options of Electronic Invoice Presentment & Payment (EIPP). Here again, though, the number of buyers utilizing EIPP to take advantage of early pay discounts is comparatively small. A recent survey by Paystream Advisors indicates only 31 percent of organizations see early pay discounts as a priority and even fewer suppliers are interested in offering discounts.

Why is that? Because buyers, many of them flush with cash right now, are still reluctant to part with their money, and suppliers are still hesitant to offer discounts for fear the discount will be taken even if not earned.

Perhaps it is a matter of trust. An early pay discount term is an offer, not a promise, of early payment. Suppliers must rely on the buyer to take advantage of the early pay discount, and all too often, when cash is tight and suppliers need it most, buyers opt to give up the discount and pay later. Further, the ubiquitous discount term of “2% 10, Net 30,” while a great deal for the buyer, is quite costly to the supplier. By accepting a mere 2 percent discount for receiving the payment 20 days sooner, the supplier is offering the buyer a 36 percent return on investment.

Other options exist for suppliers to get paid early at better discount rates and simultaneously allow buyers to maintain or extend terms. Trade finance, for example, is a viable alternative. Under this scenario a financial institution, such as a bank, steps in. Upon invoice approval, the bank pays the supplier minus a financing discount. The buyer then pays the bank the full invoice value at an agreed upon date in the future.

The buyer benefits by stabilizing cash outflow, and either maintaining or extending days payable outstanding (DPO). The buyer also no longer needs to be in the business of negotiating and maintaining discount payment terms. The supplier in turn is now guaranteed early payment and typically at a much lower discount rate. Trade Finance thus makes early payment a supplier’s rather than a buyer’s choice; within this scenario a supplier will be much more interested in joining an eInvoicing network.

What this all means is that buying organizations need to look at their payables holistically. A silo approach that focuses purely on eInvoicing or electronic payments will produce minimal results. Only when process automation is coupled with a working capital strategy that considers both the needs of the buyer and supplier will adoption and subsequent benefits be maximized.

More effective cash management is in fact the best reason to consider EIPP. Every dollar saved in operational efficiency and every dollar freed through DPO extension is extra working capital to apply to your organization’s true mission, which is investing in your business and not in your payables.

More and more buyers are realizing this. Industry data indicates that about one in five organizations have adopted EIPP tools, and the pace is projected to accelerate in the next three years. With the proliferation of alternate settlement and supplier financing options, EIPP is on its way to reaching critical mass. The time for your organization to explore it is now.

You can contact Gustav Khambatta via email, gustav.khambatta@usbank.com.

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