Methods for Predicting Which Suppliers Are Open to Taking Early Invoice Payment

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Editor Coda
May 24, 2017

By Ernie Martin, Receivable Savvy

For as long as there have been customer-supplier relationships, there have been late payments. The most important component of any operation is cash flow. With healthy cash flow comes working capital that allows the organization to invest, expand, manage payroll and more.

It should come as no surprise that the most important issue to supplier organizations is getting paid faster by customers. Not only do supplier organizations wish to be paid to term (i.e. 2/10, net 30), they hope to get paid early – but not in every situation and not under any circumstance. Simultaneously, customers wish to hold onto their cash for as long as possible. Thus, a potential dilemma exists; how to handle that cash sitting between a supplier’s desire for fast payment and a customer’s desire to hold onto it longer.

More customers are finding that they can utilize available cash on hand to generate incremental revenue by paying an outstanding invoice early in exchange for a small percentage of the invoice total. For some supplier organizations, being paid early is not a necessity. When payment terms hover somewhere between 30 and 45 days, suppliers can incorporate that timeframe into their Invoice-to- Cash cycle times without negatively impacting cash flow. When payment terms approach 60 to 90 days or more, being paid sooner may be of greater interest to suppliers. With this in mind, how might a customer more scientifically determine whether a supplier organization is open to accepting early payment?

According to Receivable Savvy’s 2017 Perceptions Study – Analysis of Invoice-to- Cash practices and preferences of supplier organizations, respondents were asked if their company was open to accepting early invoice payment in exchange for a percentage (i.e. 1% to 2.5%) of the invoice. As shown in Figure 1, 48% of respondents indicated that they were open to doing so, 40% indicated they were not and 12% were not sure.

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If we drilled down a bit further and segmented the answers based on two criteria - invoice submission method and invoice volume – we found that 63% of suppliers that utilize ERP billing systems, 62% that use small business solutions such as QuickBoooks and 60% of suppliers that use third-party e-Invoicing solutions were open to taking early payment. Those less open to taking early payment included suppliers that submitted invoices via a portal they created for their customers (49%) and those that used paper to submit invoices (50%).

When considering invoice submission volume, 74% of suppliers submitting between 2,501 and 5,000 invoices annually were open to receiving early payment. This was followed by 62% of suppliers submitting between 501 and 1,000 invoices and 46% of suppliers submitting more than 10,000 invoices annually. Those less inclined to take early payment had annual invoice submission volume between 101 and 250, where only 40% indicated they were open to it.

Insights from the 2017 Perceptions Study provide a glimpse into those variables that might predict a supplier organization’s openness to taking early payment. Further analysis using a multivariate model and incorporating other questions from the study could predict, with some certainty, which suppliers would be open to early invoice payment and which ones would be less inclined.

For Treasury and Shared Services departments, this information is very helpful in determining not only where the focus should be applied when rolling out initiatives designed to increase revenue, but will also help in fashioning messages designed to speak to each segment’s individual set of challenges and overcome objectives.

To read the full Receivable Savvy 2017 Perceptions Study, you can download it by going here.

Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific in addition to several years as an independent consultant.

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