Updated on: Feb 16th, 2022
4 min read
Today, dynamic discounting delivers greater flexibility to the suppliers, enabling them to receive payments whenever they need it, much earlier than the agreed payment terms. The earlier an invoice is paid, the higher the discount received by the buyer.
Dynamic discounting refers to the discounts offered by a supplier to its buyer depending on the payment dates. Usually, suppliers offer higher discounts to buyers for making an earlier settlement. Dynamic discounting offers the customers the flexibility in choosing how and when to make payments for their purchases.
Benefits for Buyers:
Benefits for Suppliers:
Usually, the management and supervision of dynamic discounting could be cumbersome for a large corporate as they would be required to manage the whole process while managing the corporate-supplier relationships.
In the overall scheme of things, dynamic discounting offers a low-risk financing alternative for a buyer wishing to boost profitability and give his suppliers the advantage of early payment. While the suppliers participating in this programme take some hit on profitability — having to discount the price of their goods or services — most of them, especially the SMEs, do this willingly. For them, it’s more important to lower their DSO (Days Sales Outstanding, i.e. the number of days to receive payment from the customers) and improve liquidity for growing their business.
Dynamic discounting is a win-win situation that assists both trading partners. This solution not just reinforces each party’s financial health, but also enhances their relationships throughout the supply chain.
Purchasing organisations could use the excess cash for gaining early payment discounts that subsequently decrease the Cost of Goods Sold (COGS), lift margins, and earn a better profit return on liquidity. A supplier could benefit from the flexibility of dynamic discounting a part or all its receivables. For a supplier, dynamic discounting offers the flexibility to be paid much earlier than the maturity of the invoice, often at attractive terms than alternative methods like factoring or asset-based lending.
The benefit is apparent for a cash-rich purchaser operating in an environment with low interest. Instead of leaving liquidity in the low-interest account, the purchaser could always pay all its large invoices early to receive extra discounts and maximise its profitability. Most significantly, the suppliers get paid earlier continuously, which further leverages their liquidity position and subsequently enables them to pay their own suppliers at the earliest, grow their business, or continue to do more business with the buyer.
I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more
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