Optimising Liquidity: The Role of Supply Chain Finance and Dynamic Discounting
Published: January 27, 2025
SCF and dynamic discounting are financial tools designed to integrate payment management with supply chain financing, enabling organisations to optimise cash flow and strengthen supplier relationships. Here’s a quick reminder of how and why they work.
In today’s business environment, liquidity management and working capital optimisation are strategic priorities for companies. Tools such as SCF and dynamic discounting have emerged as innovative solutions to enhance the financial health and performance of businesses.
SCF is a suite of financial solutions designed to improve cash flow across supplier-customer relationships. This system enables buyers to extend payment terms without impacting suppliers’ liquidity. Simultaneously, suppliers can access early payments, enhancing their working capital position.
Dynamic discounting, on the other hand, is a flexible financing strategy enabling suppliers to receive early invoice payments in exchange for discounts that vary based on the timing of the payment. Unlike traditional fixed discounts, dynamic discounting adjusts the discount percentage automatically depending on how many days before the invoice due date the payment is made. Earlier payments result in higher discounts.
These solutions enable suppliers to access funds sooner while enabling buyers to tailor discounts to align with their cash flow. The terms of dynamic discounting arrangements are flexible and negotiable between the parties involved.
A practical example
TechWare is a UK-based consumer electronics company producing phones, computers, and smart devices. The company works with multiple international suppliers that provide key components like microprocessors and batteries. Many of these suppliers are medium-size enterprises reliant on timely payments to sustain their operations.
TechWare faces competitive market pressures to maintain low production costs and competitive pricing. During periods of reduced demand, the company may need to extend payment terms to manage its cash flow, potentially straining relationships with suppliers who rely on timely payments.
To address this, TechWare has implemented an SCF programme, enabling it to extend its own payment terms while offering its suppliers the option of early payments. The company also integrates dynamic discounting for added flexibility.
Example Terms:
- Invoices are issued with a 60-day payment term.
- Suppliers can access payment earlier at variable discount rates:
- Payment on the invoice date: No discount applied.
- Payment 30 days early: 1% discount.
- Payment 45 days early: 2% discount.
- Immediate payment: 3% discount.
This system provides flexibility for both TechWare and its suppliers, enabling payments to be timed according to cash flow needs.
Reaping the benefits
- Improved liquidity: SCF and dynamic discounting enhance liquidity without increasing debt or resorting to additional financing. Buyers and suppliers can optimise cash flow, maintain operational capital, and allocate resources effectively.
- Optimisation of working capital: These tools balance extended payment terms with advance payments to suppliers, ensuring working capital aligns with business priorities. This flexibility is critical in cyclical or seasonal industries where cash flow can fluctuate.
- Reduced operating costs: Dynamic discounting reduces financing costs for suppliers while offering buyers cost-saving opportunities, benefitting both parties without compromising product or service quality.
- Stronger supplier relationships: Early payment options improve suppliers’ financial stability, fostering trust and ensuring supply chain continuity and resilience.
- Sustainability in the supply chain: SCF and dynamic discounting promote economic sustainability by supporting fair payment terms and enhancing supplier financial health, contributing to a stable and ethical supply chain.
- Digitalisation of payment processes: SCF platforms automate payment and discount management, improving transparency, efficiency, and accuracy. Suppliers gain real-time visibility into invoice statuses, payment terms, and available discounts.
Keys to success
To implement dynamic discounting effectively, companies should:
- Assess feasibility and objectives: Analyse cash flow needs and working capital requirements. Define specific goals, such as improved liquidity or cost savings.
- Select the right platform: Choose a dynamic discounting solution that integrates seamlessly with existing ERP systems, automates discount calculations, and provides real-time data.
- Engage suppliers: Communicate the benefits of participation, such as improved cash flow and reduced dependency on short-term financing. Transparency fosters trust and collaboration.
- Monitor and adjust: Regularly evaluate metrics such as supplier adoption rates and cost savings to refine the strategy and maximise its impact.
Adding an edge
SCF and dynamic discounting are transformative tools for improving liquidity, optimising working capital, and fostering supplier relationships. These solutions enable businesses to navigate financial challenges, seize growth opportunities, and maintain a competitive edge.
Strategic planning and supplier collaboration are essential for successful implementation. By investing in these tools, companies can strengthen their financial health and build a more sustainable, resilient supply chain.