Can Treasurers do more with their capital?

A crisis like the COVID-19 pandemic brings to light the necessity of treasurers optimizing cash reserves to yield maximum possible returns. During such times, treasurers have to manage cash requirements internally and opt for relatively less risky alternatives beyond Government funds, top-rated bonds, and fixed deposits to earn extra margins and improve treasury income.

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Early Pay programs are one such risk-free alternative available to the treasurers. Several corporates are already using early pay programs for their supplier payments. However, it is often an optional line of credit used by only a few select vendors. For treasurers to reap the full rewards of an early payment program, early payment programs should be scalable to capture a substantial portion, if not all, vendors.

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And the timing to consider these programs could not be better as several small and medium enterprises are looking to convert their receivables to cash quicker to navigate the current times.

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A look at Dynamic Discounting

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Dynamic discounting is a type of supply chain financing wherein suppliers can obtain early payments against their receivables instead of waiting till the due date. However, while traditional supply chain financing programs are funded by banks or financing partners, in dynamic discounting, organizations choose to invest surplus cash by paying suppliers early in lieu of upfront cash discounts.

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Conventionally rigid supply chain financing models offer no room for flexibility in 2 critical variables for the supplier: Time and Cost. Traditional financing programs had a blanket credit duration for discounting invoices for 30/60/90 days, and suppliers, whether interested or not, had to bear the interest for the entire credit duration. Secondly, financial institutions fixed the interest rate for every supplier-corporate combination for every transaction irrespective of the demand or supply of funds.

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Both the limitations are removed with dynamic discounting, offering a true win-win solution for buyers and sellers. Sellers can discount their invoices any time before the due date, depending on their fund requirements. And the rates of interest are tailored by an AI-backed algorithm that matches the availability of funds with the demand to determine the cost of financing dynamically.

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A few factors to consider before setting up an early program

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1.    Overlaps with existing early payment programs:  If you are already running an early payment program, you need to align internally to integrate a dynamic discounting program with its current structure. This consideration should not be limited only from a treasury standpoint but must also seek buy-in from procurement teams to protect the supplier's interests.

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2.    Technology as an enabler: No dynamic discounting program can run successfully without an agile technology facilitating these transactions. Platforms like Cashinvoice are designed to give organizations as much flexibility and deeper insights to determine the most likely interest rate that would be accepted by a supplier and automate the processing of invoice, discount value, payments, and reconciliation. A dynamic discounting program that is variable across vital parameters cannot be fulfilled without the right technology support. It will be counterproductive as more resources, time, and energy will be needed to execute it manually.

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3. Clarity on the program's purpose: It is essential to be clear about why you are undertaking a dynamic discounting program. Is it motivated by the need to earn additional treasury income? Or to support your suppliers from filing for insolvency in a crisis? Is the program intended to reduce the cost of procurement or to earn better returns on treasury funds? Each of these answers will help you customize your early payment program in a manner that works best for you.

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4. 100% Self-funded or Hybrid: While you may be sitting on a high volume of cash reserves currently, there could be a possibility where you may not be in a position to fund 100% of early payments in the future. If you reckon that is possible, it might be advisable to go with a hybrid early payment program model to fall back on funding partners to fund invoices in months with a limited cash surplus.

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There is no doubt that companies are looking for ways to access cash at cost-effective terms in the current scenario. Also, it might be prudent to consider that the pandemic's consequences are yet to unfold fully and could have a substantial lag. Small and medium suppliers would require the support necessary to keep themselves afloat and navigate these challenging times in the upcoming months. If so, dynamic discounting can play a pivotal role in providing this assistance to businesses while also improving treasury returns.