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Sometimes the balance sheet does not tell the whole picture of a company's health. Take for example the 2011 bankruptcy of Borders Group which had not recorded its store leasing commitments on the balance sheet -- commitments that totaled $2.8 billion, or 7 times its registered liability on the company balance sheet.
In 2016, the International Financial Reporting Standard (IFRS) organization introduced a major new standard on accounting for leases - IFRS 16, which is effective for annual reporting periods beginning on or after Jan. 1, 2019.
Underscoring the major impact of IFRS 16 as it relates to implementation challenges, a 2017 poll by Deloitte found that 47.1 percent of executives had serious doubts about their company's ability to comply. The poll also found that 31.4 percent of executives said their companies were not prepared to comply with the new lease accounting standard.
Implementation and compliance challenges notwithstanding, the other sticky wicket companies are grappling with is how to devise financial strategies that add revenues to the balance sheet to offset lease liabilities, as per Deloitte, IFRS 16 “will have an impact on EBITDA, cash flows and total assets.”
The Dynamic Discounting Imperative
While dynamic discounting has been in existence for several years, today it’s fast becoming one of the key tools of today’s new breed of innovative CFOs who are discarding the traditional practice of holding onto cash and delaying payments, which has proven to deliver inadequate returns in today’s fast-moving and demanding economy. Leading organizations leveraging dynamic discounting are surging ahead of their peers by making early-pay discounts a real and significant source of cash -- capturing up to 2 percent percent of corporate spend directly back to the bottom line and optimizing cash management in real-time. As a result, CFOs of these organizations are blazing a trail for the “new normal” in corporate finance where the accounting department is embracing digital business transformation and its new strategic role as a profit center.
According to the 2017 AP & Working Capital Report by PayStream Advisors, dynamic discounting – once relegated to only to the most sophisticated best-in-class finance organizations – continues to expand its sphere of adoption due to the provocative business case and the number of organizations saving millions of dollars by implementing dynamic discounting as a discipline.
Dynamic discounting allows businesses to dramatically increase early pay discounts by providing a much more “supplier-friendly” model. By giving suppliers the ability to request early-pay discounts when they need cash and the added instant visibility of inflight invoices, enterprises can expedite processing of discounted invoices and see a quantum leap in supplier participation and increased cashflow. Arming the enterprise with the ability for suppliers to dynamically request early-pay discounts fundamentally changes the game, providing a win-win for both sides of the procure-to-pay (P2P) value chain. It delivers the fastest payments for suppliers, while maximizing discount returns for customers – especially when compared to traditional legacy investment alternatives notorious for their slow time-to-value.
According to the Bavelos Group, a consulting firm that advises companies on ways to improve working capital, “leading companies are rapidly finding that early payment discounts are an attractive option for treasury to invest cash at double-digit, risk-free returns. A 2 percent discount for a 20 days cash acceleration is a 36 percent annualized return. And while not all suppliers offer this level of savings, over 50 percent of early payment discounts yield better than a 30 percent return.”
By loosening the purse strings, paying early and creating a supplier friendly and flexible environment, CFOs are unlocking the value trapped inside payables – and supplier relationships.
Key Requirements for Dynamic Discounting
To maximize the potential of this paradigm shift and adopt dynamic discounting, organizations need speed, visibility and agility. Dynamic discounting needs to be coupled with next-gen invoice automation and supplier enablement to ensure that the procure to pay process is a high-performance, well-oiled machine and that there is enhanced visibility to capture and realize all available early-payment discount opportunities. This combination of speed, visibility and agility enables enterprises to quickly capitalize on every early-pay discount available, properly attend to their supplier networks and substantially reduce invoice processing costs.
Real-time integration with ERP systems – the enterprise systems of record – are key, as well as other key enablers including cloud and mobile technologies. Together, these technologies dramatically accelerate time-to-value and enable processing work and approvals to be done anytime, anywhere and via any device — eliminating traditional processing bottlenecks.
As well the dynamic discounting process requires Finance to securely bring suppliers directly into the payment process. A supplier portal provides the self-serve means for suppliers to easily check the status of payments, see purchase orders for all their sites, quickly flip POs into invoices — and most importantly, easily request early pay discounts. Bringing suppliers directly into the process in this way also enables suppliers to create invoices that are validated and exception-free from the get-go.
By creating valuable and frictionless experiences for suppliers, companies can see a tremendous boost in supplier adoption that will drive an equally impressive increase in early-pay discounts. These critical enabling technologies are helping Finance departments move well beyond basic operational efficiency to focus on strategic value creation that delivers real horsepower to the bottom-line.
With less than one year until the compliance deadline of IFRS 16, finance leaders will continue to need to look harder for returns and think more strategically about cash management. However, they need not look far – the secret is in unlocking the value of their payables through dynamic discounting.
Chris Preston is Executive Vice President of Inspyrus, Inc.