In practice, I see very few companies using payment discounts. This is remarkable, because with payment discounts companies can realize substantial savings. But what is even more remarkable is that paying invoices on time is already proving difficult. Indeed, paying after the payment deadlineseems to be the norm rather than the exception in the Netherlands. What is going on here?
Independent research by DirectResearch shows that, on average, one in seven large companies in the Netherlands pays the majority of their invoices late.
Missed payment discount
Not surprisingly, many companies in the Netherlands suffer from invoices that are paid late. To encourage buyers to pay earlier, many suppliers offer discounts for early payment of invoices. A payment discount of 1 percent is not unusual; 2 percent is also common.
This may not seem like much, but the savings can add up nicely when you have a lot of spend as a company. Research by Forrester shows that companies with an annual spend of 300 million euros over a three-year period miss out on an average of about 400,000 euros in payment discounts. Why aren't companies taking advantage of this?
READ ALSO: "The faster we can process invoices, the faster we can pay them."
Right insights and process design
It turns out that paying on time is already a challenge for many businesses. The reasons for late payment are varied. For example, some of the companies deliberately pay late in order to maintain liquidity. Some companies have financial problems and sometimes there is a dispute over the products or services delivered. But in the majority of cases, it appears that the systems do not provide the right insights to take full advantage of opportunities such as early payment discounts.
However, software alone does not solve the problem. Because even in companies that use sophisticated invoice processing systems, I see that payment discounts are not always used to their full potential.
Understanding which invoices to pick up first and the speed with which accounts payable can handle invoices is certainly important. But accounts payable is notthe only thing that determines whether or not a payment discount is met. A company's payment behavior has more to do with how the process is set up.
Slowing factors
An example. Suppose a wholesaler has discount agreements in place with its top ten suppliers: if the wholesaler pays an invoice within 14 days of the invoice date, the supplier will give it a 1 percent discount on the total invoice amount. The wholesaler in question employs sophisticated automated invoice processing software and works largely with 3-way matching (meaning that the invoice cannot be released for payment until it matches both the order and the goods receipt).
In this example, there are a lot of factors that affect meeting the agreed payment discount. How soon does the supplier send the invoice, before or after delivery of the goods? Does he send an invoice for each order or a collective invoice? And what date is on this? How long is this invoice waiting before it is sent into the system? In what format is the invoice delivered? Is it a pdf invoice, with or without machine readable data, or an electronic invoice, in what format?
What is the prioritization of accounts payable for processing invoices? Is there sufficient understanding in the invoice processing process whether a payment discount is in effect on an invoice at all, and if so what is the deadline for achieving it? How quick is the budget holder's approval for goods without a purchase order? How long does logistics take to verify the goods delivered and book them in?
💡LEESTIP : Paying on time as a business is a matter of good decency, right?
Eliminate waste
Within your company, are payment discounts never met or are payment obligations not met on time at all? Check whether your automation systems provide sufficient insight into the invoice processing process. In addition, map out the entire process and identify where the delaying factors are in the process.
Then engage with relevant stakeholders (including, in the example cited, the logistics department) to see how waste can be removed from the process as much as possible. Take a close look at the agreements you make with your suppliers on the way of invoicing. Does a supplier send the invoice immediately after the order or only after delivery? Or does he periodically send a (clumsy) collective invoice? Is there a realistic term agreed for a payment discount?
Good payment behavior
What I see happening in practice is that workarounds are invented to get an invoice approved faster instead of removing the delaying factors. This is where the infamous lists in Excel come into play again, showing, for example, which orders are still blocked in the ERP.
However, then automation misses the point. The most important thing is to take a good look at the process first, and that includes better agreements with various stakeholders. Good payment behavior is not only the responsibility of accounts payable.
Want to know more?
Please feel free to contact me or my colleagues to exchange views.
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Ronald den Hartog |
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