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Early payment in AP (how much am I really saving?)

by Richard Pollina

March 11, 2022

An early bird gets all the worms. In this case, an early buyer gets all the discounts. Discounts are a ray of hope to the small and medium businesses, which let them compete with the large companies in the market. Early payment or dynamic discounting is an excellent way to ensure that the relations between you and your supplier are not strained, and it is beneficial for you.

This article highlights the importance of paying early in a business deal and how you can claim the advantages of early payments.

Dynamic discounting

Dynamic discounting is a way by which you can get discounts by paying early. This is a way to leverage your supply chain so that it is beneficial for both parties, the supplier and the business. It is a flexible way to make payments on your terms; you can choose when to pay and how soon to pay. While traditional methods are more straightforward, like ordering in bulk or bargaining, dynamic discounting is much more efficient to go about doing your business.

Dynamic discounting is denoted in such a way: “5/15 net 45”. This means that a discount of 5% can be availed by the buyer if they pay the money in 15 days. The net 45 part means that the payment can be made in 45 days; however, the discount can only be availed in the specified period. You need to be very careful when you make payments, or you can automate your AP workflow for the same.

How important is an early payment?

Early payments are the key to your business’ success. If you pay a vendor early, it helps accelerate the cash flow in both the companies (yours and your vendor’s) and lets them reinvest the money sooner. It also generates a sense of trust between you and your supplier, and it completely negates the risk of bad debts (payments you cannot make). Making early payments can also expand your repertoire of suppliers you can approach, like the companies that work on a cash basis rather than an accrual accounting basis.

Early payments are an excellent marketing scheme. They go well with startups and medium businesses; early payments are more feasible than traditional ways of making payments. This is because they are in a growing stage, and they don’t have a customer base large enough to make use of the entire stock they buy (if they buy in bulk).

How Can You Get Them?

The best way to avail of discounts in this market is to automate your AP workflow. This is really advantageous for new businesses, as they can start off with an automated workflow, unlike large companies which have a pre-established workflow. What does AP workflow automation mean? It means that you are leaving the manual tasks like filing, storing, and paying invoices to the software, which helps you automate the workflow. This makes sure that your work becomes more precise and efficient.

The best way to see if your vendor offers early payment is to ask them. It is as simple as that. If they provide early payment discounts, all you need to do is enter a date into your system by when you need it done, and that’s all. You will save a lot of money this way; it is a godsend for small and medium businesses.

What can go wrong?

There are several steps involved in the accounts payable process, which include writing the names of the vendors along with their details and then waiting for the confirmation, after which the payment process finally comes to an end. This process includes a lot of time and steps, especially if the data is prepared manually. This even increases the risk of payment failures or errors.

There are possible chances of losing your hard-earned money due to duplicate payments. Sometimes, you can end up paying for both original and duplicate invoices. Besides, it also becomes difficult for you to keep track of which business location is paying which vendors if your business is running in multiple centers.

Early payments don’t have too many risks associated with them, but if there is an error in the AP workflow automation, there can be improper payments from your side. It would be best if you were careful of the amount you are sending to your vendors.

Conclusion

In conclusion, the best way to avail of discounts without bargaining or ordering in bulk is to automate your AP workflow and make early payments. It would be best if you asked your vendor whether they provide the services. Small and medium businesses don’t have the option to spend too much money on procuring supplies over research development. So you should make sure that you can avail such discounts to save money.