20 Jun 2011 Let’s not over complicate dynamic discounting
I knew somebody a few years ago who ran a small, very successful business. When it came to negotiation he had a unique closing technique. Right at the end, when contacts were to be signed and hands shaken he’d go along to the final meeting with a briefcase and before he signed the contract he’d ask for one final reduction in the price. The reaction was predictable. After weeks, perhaps months of selling, discussing and fine tuning the deal, to be asked for a further discount on top of what was already agreed, the seller would invariably be perplexed and disappointed. Then the briefcase would be opened. Cash. The full amount in cash, now, if they’d take the revised offer.
Did they accept the offer? Every single time. Because early and risk free payment is highly valuable.
An auditor would have a field day with this. Not what you would call purchase to pay best practice perhaps and maybe it’s not the level of professionalism one would expect in 2011. Sharp practice perhaps, but unethical? I think not. Presenting the offer in a briefcase full of cash is simply a dramatic way of emphasizing the value of early payment, timed to get maximum benefit. And, despite the urban myth feel of this anecdote (I never actually witnessed such a deal but I do like to imagine it’s based in truth), there is a way that buyers today can leverage the attraction of early payment to obtain further discounts.
I spent some time with Torsten Budesheim, Marketing director at Taulia last week to see their dynamic discounting solution at work. It’s an impressive piece of kit with a comprehensive but intuitive user interface to show buyers and sellers their options in real time. A buyer is able to offer to pay any invoice early for an agreed discount depending on the timing of the payment. The seller can take the early payment of any or all of their outstanding invoices depending on their need. Say for example, the seller needs to cover this month’s wage bill and wants to avoid an expensive overdraft extension. They simply look at how many invoices they need paying early, calculate the cost in terms of the discount they need to forgo and compare that with the potential overdraft costs. If it offers a better deal than the bank – go for it. It’s compelling.
And by the way, it will always be a better deal than the bank. Why? Because the bank has to charge interest based on the risk of default. By dealing direct, there’s no need. Dynamic discounting cuts out the middleman costs.
Let’s not over complicate dynamic discounting
There’s been lots of debate about supply chain finance arrangement like dynamic discounting and it’s true that there can be an awkward conflict between treasury managers and buyers about the relative value of discounts compared to cash flow but we run the risk of over-complicating the situation.
We can wrap up our deliberations in accounting jargon. We can talk in code and make ourselves sound very clever referring to DPO, DSO and EBITDA and our mothers will be proud of us but it’s much more simple than that. To a buyer – it’s an immediate extra discount on spend that’s already been committed. To the supplier, it means cash in the bank this time tomorrow, the wage bill covered and they can live to fight another day.
It’s not quite cash in a briefcase but it’s just as good.