Executive Briefings

Process Bottlenecks Hinder Opportunities for Early Payment Discounts, Study Finds

Nearly 80 percent of international businesses are unable to take advantage of early payment discounts from their suppliers, mostly due to internal payment process bottlenecks, according to global research report by Basware and MasterCard.

The survey also found that 84 percent of respondents pay suppliers late, primarily due to the lack of necessary systems and automation to facilitate timely payment. Late payment reduces critical operational expenditures and hinders businesses from accurately forecasting their cash position beyond ten weeks – which leads to financial instability and hinders economic growth.

The Creating Payment Energy research surveyed more than 1,000 strategic decision-makers across the U.S., Europe and Australia to study the dynamics of cash flow and payment processes and their impact on economic performance.

“Paying invoices or getting them paid on time is a challenge for many companies, and I’ve met several CFOs that have been frustrated with slow-moving money and cash flow problems,” said Esa Tihilä, CEO of Basware. “But it does not have to be this way: Early payment can help open up the lines of cash flow while reaping financial and reputational benefits at the same time. There is a balance to be recognized on both the supplier and the buyer side though. While discounts are an effective way of encouraging early payment, making them too high can have the same impact as late payments: disrupted businesses, slow growth and a negative impact on the wider economy. By having a clear and up-to-date view of the financial status of the business at all times, combined with efficient and automated payment processes, managers can confidently pay suppliers early without any risk."

Additional findings indicate that:

• Suppliers are prepared to offer substantial discounts to bring payment forward, potentially and unknowingly undermining their own margin structures. The average discount offered is eight percent, but some respondents said they will offer 50 percent or more in certain circumstances

• Respondents estimated that they could save, on average, 14 percent of overall financial expenditure if all customer invoices were settled within optimum payment terms

• Businesses want to take advantage of these offers, with 44 percent saying they would prefer to pay immediately for a higher discount

• However, seven out of ten (69 percent) businesses admitted that process bottlenecks compromise their ability to access supplier discounts

• In fact, only one in five businesses has highly automated processes with fully optimized systems to manage invoice payment efficiently

The research creates a clear picture of the rift that exists, showing that it is not a lack of funds, but rather a lack of capability for businesses to make the most of the savings they are offered. While 88 percent of buyers believe they have a social responsibility to pay promptly, it still takes an average of ten days for payment to take place.

As financial decision-makers try to balance the ethical and commercial implications of timely payment with the desire for financial security, there is an important role for the intermediary processes that are connected to payment. According to the survey, the majority of invoices are sent and received via PDFs within emails (48 and 50 percent respectively). Approximately one third (32 percent) use EDI/XML systems to send invoices and one quarter receive them this way, while web portals are used by 17 percent of respondents to send invoices and 19 percent to receive them.

The research also shows that the benefits of timely payment are many and widely recognized. Four out of ten respondents said that it would help reduce credit lines as well as enable them to invest more in their businesses overall. Additionally, 36 percent said it would also improve relationships with creditors and one third viewed it as a way to reduce resources on payment settling.

Source: Basware

The survey also found that 84 percent of respondents pay suppliers late, primarily due to the lack of necessary systems and automation to facilitate timely payment. Late payment reduces critical operational expenditures and hinders businesses from accurately forecasting their cash position beyond ten weeks – which leads to financial instability and hinders economic growth.

The Creating Payment Energy research surveyed more than 1,000 strategic decision-makers across the U.S., Europe and Australia to study the dynamics of cash flow and payment processes and their impact on economic performance.

“Paying invoices or getting them paid on time is a challenge for many companies, and I’ve met several CFOs that have been frustrated with slow-moving money and cash flow problems,” said Esa Tihilä, CEO of Basware. “But it does not have to be this way: Early payment can help open up the lines of cash flow while reaping financial and reputational benefits at the same time. There is a balance to be recognized on both the supplier and the buyer side though. While discounts are an effective way of encouraging early payment, making them too high can have the same impact as late payments: disrupted businesses, slow growth and a negative impact on the wider economy. By having a clear and up-to-date view of the financial status of the business at all times, combined with efficient and automated payment processes, managers can confidently pay suppliers early without any risk."

Additional findings indicate that:

• Suppliers are prepared to offer substantial discounts to bring payment forward, potentially and unknowingly undermining their own margin structures. The average discount offered is eight percent, but some respondents said they will offer 50 percent or more in certain circumstances

• Respondents estimated that they could save, on average, 14 percent of overall financial expenditure if all customer invoices were settled within optimum payment terms

• Businesses want to take advantage of these offers, with 44 percent saying they would prefer to pay immediately for a higher discount

• However, seven out of ten (69 percent) businesses admitted that process bottlenecks compromise their ability to access supplier discounts

• In fact, only one in five businesses has highly automated processes with fully optimized systems to manage invoice payment efficiently

The research creates a clear picture of the rift that exists, showing that it is not a lack of funds, but rather a lack of capability for businesses to make the most of the savings they are offered. While 88 percent of buyers believe they have a social responsibility to pay promptly, it still takes an average of ten days for payment to take place.

As financial decision-makers try to balance the ethical and commercial implications of timely payment with the desire for financial security, there is an important role for the intermediary processes that are connected to payment. According to the survey, the majority of invoices are sent and received via PDFs within emails (48 and 50 percent respectively). Approximately one third (32 percent) use EDI/XML systems to send invoices and one quarter receive them this way, while web portals are used by 17 percent of respondents to send invoices and 19 percent to receive them.

The research also shows that the benefits of timely payment are many and widely recognized. Four out of ten respondents said that it would help reduce credit lines as well as enable them to invest more in their businesses overall. Additionally, 36 percent said it would also improve relationships with creditors and one third viewed it as a way to reduce resources on payment settling.

Source: Basware