Every company needs to know when cash is coming in, but for small businesses it can make the difference between...
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closing the doors and living to fight another day. Some are turning to dynamic discounting software to speed up their accounts receivable and tap into electronic invoicing -- or e-invoicing -- as a new source of working capital.
Dynamic discounting is fueling triple-digit growth at Mediafly, a Chicago-based maker of business media services and systems that Fortune 500 companies use to securely distribute digital content. For just over a year, Mediafly has used the Ariba Network’s Discount Professional and Invoice Management Software as a Service (SaaS) applications to secure what amounts to short-term loans from cash-rich customers.
The software has been a “game changer,” allowing Mediafly to take on projects it couldn’t otherwise fund, according to CEO Carson Conant.
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“Our contracts tend to be kind of multiyear, seven-figure deals, and the invoices tend to be large, six-figure deals,” Conant said. In the current economic climate, many customers are delaying payment on those invoices as long as possible, sometimes requiring terms of 60 days or longer. “For a small company like us, and a very nimble company, that has a lot of effect on how you deploy capital,” he said.
Mediafly considered the receivables financing that some banks offer, but the application process was slow and the company would only receive approximately 75% of the value, compared to 100% from dynamic discounting. “Banks, in this economy, don’t lend to small companies that don’t have strong balance sheets,” Conant said.
The dynamic discounting service allows Mediafly customers to pay early in exchange for discounts on their bills. “The further you wait in the cycle, the discount you have to give goes down,” he said.
Conant recalled one job in the $700,000 range that was paid in a fraction of the usual time. “With this engagement, we knew exactly when that money was going to show up,” he said. “What would have been a 60-day payment was accelerated to 14 days.”
By finishing that project sooner, Mediafly was in position to jump on an unexpected opportunity from a global bank. “We got that deal done in record time because we have this capability we wouldn’t have had without this discount program,” Conant said. “The cost to us was basis points,” maybe a couple of hundred dollars, he recalled. “It was equivalent to what we might spend at a happy hour for the engineering team.”
E-invoicing helps automates dynamic discounting
Dynamic discounting, also called dynamic discount management (DDM), is “an emerging discipline that gives buyers more flexibility to choose how and when to pay suppliers,” according to a March 2012 report by PayStream Advisors that was partially underwritten by Ariba.
In the report, the Charlotte, N.C.-based research firm said DDM gives buyers the ability to initiate discount offers rather than waiting for the 2% discounts that many suppliers have traditionally offered for payment within 10 days. It doesn’t have to be automated, strictly speaking. But by using DDM on an e-invoicing network such as the Ariba Network, JP Morgan Chase’s Order-to-Pay, Direct Insite, Taulio or OB10, buyers can post their approved invoices, let suppliers decide whether to take the offer, then process the entire transaction electronically, according to the report.
It’s typical for buyers on the Ariba Network to have 20-25% of their suppliers participating in dynamic discounting, said Drew Hofler, Ariba’s senior solution marketing manager. The impetus to use the service typically comes from buyers’ finance, treasury or accounts payable departments, because they understand its potential for working capital management, he said. “Sourcing and procurement and salespeople don’t care about cash flow [unless] the discount can be part of the sales negotiation.”
In contrast to the buyer-driven model described by PayStream Advisors, it’s Mediafly that offers the discounts once it knows a customer is on the Ariba Network, according to Conant. “We don’t actually have a lot of influence over whether these large companies use Ariba or not,” he said. “Their CFO would say, ‘We’re going to go with an e-invoicing solution.’ I think that’s the first decision.” Ariba claims to have 1,100-plus buying organizations on its network.
Conant said it is easy to enter and process invoices through the browser-based system. “It’s like Gmail. You open up this email, and it’s there,” he said. Except for electronic funds transfers, the Ariba software isn’t integrated directly with Mediafly’s cloud-based enterprise version of QuickBooks. It doesn’t need to be because the required accounting entries are minimal.
Automated invoicing with working capital management saves time, money
Mediafly also uses some customers’ ERP-driven invoicing, including from SAP. “We’ve had experience with all of them,” Conant said. “So far, Ariba is the most fluid to us. SAP is manual and not transparent, and they don’t have dynamic discounting.”
The automated invoicing workflow has saved Mediafly from hiring an accounts receivable person. That’s partly because having visibility into the invoicing process means Mediafly doesn’t have to wonder when payments are likely to arrive or make time-consuming calls to customers to find out, he said.
The company controller is the main user -- though Conant and the CFO receive statements -- and could handle significantly more electronic invoices if, say, half came through the Ariba Network and half from SAP systems, Conant said. Currently, 10% of Mediafly’s biggest customers use Ariba. “If all of the top 25 Fortune 100 customers leveraged the same system, we would be growing 50% faster as a company,” he said, because of the more predictable and accelerated cash flow.
Conant said dynamic discounting has larger implications for the economy because it’s a way to finance small businesses that can’t get conventional loans. Companies could use such financing, in effect, to spur innovation among their suppliers. “They need to understand that the invoicing and dynamic discounting can be a stimulant to their businesses by stimulating their vendor bases,” he said. “It’s just this enormous win-win that we’re trying to propagate with this little voice we have.”