Insight & Analysis

Time of the essence for supplier payments

Published: Apr 2022

Incentivising early payment appears to be an increasingly attractive option for improving cash flow among companies looking to maintain the health of their supply chains.

Logistics supply chain delivery service

When PneuSource’s customers began to extend their payment terms – in some cases from 30 days to 60 or even 90 – it placed a considerable strain on the company’s cash flow. In response, the compressed air specialist started looking for opportunities to accelerate invoice payments in order to get cash into its bank account faster.

PneuSource discovered that one of its biggest customers – a Fortune 500 food processor – was offering early payment through working capital management solutions provider Taulia.

By tapping into this system the company was able to select which invoices it wanted to receive payment early for. The normal payment terms for this customer are net 30, but with early payments PneuSource now receives payment in two days.

Company president Gary Piker says the cost (2% of the invoice value) is outweighed by the improvement in cash flow, noting that accepting card payments is more expensive and does not necessarily speed up the process of invoice settlement.

PneuSource is just one of many companies that see value in using early payment to manage their working capital. A supplier survey published by Taulia earlier this year found that 38% of respondents were taking early payments monthly last year – double the number that were taking them in 2017 when the company started the annual survey.

There has been growing interest from suppliers in regularly receiving early payment once an invoice is approved as an alternative source of finance. More than one-fifth (22%) of suppliers said they were interested in receiving early payment every time for every customer, compared to 15% in 2017.

Factors behind this growth include greater awareness of financing options and knowledge that the market has more instruments available than just traditional bank loans or overdrafts. There is also increased recognition of the importance of supporting small but strategic suppliers along the supply chain.

Suppliers’ reasons for taking early payments varied. The main reasons for their interest in early payments last year were:

  • Closing the cash flow gap (49%).

  • Collections/payment predictability (27%).

  • Meeting working capital needs (21%).

  • Ease of use (18%).

  • Reduce days sales outstanding (7%).

There is also a clear progression towards better behaviour from businesses with a decrease in late payment, which fell from 45% in 2017 to 36% in 2021. According to Taulia, the reduction in late payments signifies improvements in automation and the desire of businesses to promote their suppliers’ financial health.

Early stage companies that are generally cash flow negative often view early payment as a useful means of funding their business. The problem all companies face is that everyone wants to delay their payables but expects to be paid punctually.

Down the line, companies are expected to deploy technologies to optimise working capital – including big data and analytical models – and even use artificial intelligence bots to make decisions around when to pay early using bank funds or their own funds.

This is an area where adaptive learning and robotic process automation could be especially effective, allowing suppliers to automatically select the best invoices to request early payment discounts on based on payment terms and other factors.

This would allow companies to manage the accounts receivable versus accounts payable balancing act by paying customers based on priority while using artificial intelligence to identify likely defaulters and collect proactively.

Of course, early payment is just one of many ways to improve working capital. Other steps companies can take include simplifying the invoicing process and being as efficient as possible.

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