Dynamic Discounting: Boost cash flow & profit margins with smart pay

The principle of Dynamic Discounting is simple: those who pay quickly, pay less. Suppliers reward early payments by lowering the final price; for example, a three-per-cent discount for payment within a week, two per cent within two weeks, or one per cent within three weeks.

For suppliers, this speeds up access to liquidity and improves working capital. For buying organisations, it directly helps to improve the profit margin. “As a cash-rich business, you can create additional return simply by putting otherwise idle money to work,” says Gustaf.

Dynamic Discounting allows organisations to negotiate price reductions based on accelerated payments. Its dynamic nature means that both buyer and supplier can decide, invoice by invoice, whether to take part.

In traditional early-payment schemes, a buyer might receive a fixed two-per-cent discount if an invoice is paid within ten days. The dynamic model, however, offers more flexibility: the system automatically calculates the available discount according to the remaining payment term.

“The ‘dynamic’ element is what makes it truly powerful,” says Gustaf. “Finance teams have real-time visibility of opportunities and can decide per invoice whether to pay early. Suppliers can accept or decline. It’s entirely optional for both parties.”

Since several years, ISPnext clients have are able to have access to Dynamic Discounting. “It isn’t an obligation. It’s an opportunity organisations can actively leverage,” Gustaf adds.

Approving and paying invoices quickly opens the door to valuable discounts for early payment. The return on these payments can exceed traditional investment yields while strengthening the supplier network.

“Paying on time improves the relationship with your supplier,” says Gustaf. “You ensure predictable cash flow on both sides of the supply chain.”

For suppliers, early payment is a viable alternative to costly external financing. “Banks often charge four to five per cent interest,” explains Gustaf. “A two-per-cent discount within two weeks is far more attractive. Cheaper for the supplier and profitable for the payer.”

Dynamic discounting gives CFOs and finance leaders a strategic lever to better optimise working capital and plan cash flows. When invoices are approved rapidly, for example within 48 hours, there are two options: leave them for 28 days until the due date, or pay immediately and realise the discount. That discount goes straight to the bottom line, as the original price was already budgeted.

“The return is visible straight away,” says Gustaf. “You reduce costs while the supplier gains faster liquidity. It strengthens collaboration across the financial supply chain.”

For Dynamic Discounting to work effectively, the invoice-approval process must run smoothly. Technology is key. Within the Business Spend Management platform from ISPnext, the entire Source-to-Pay process, from procurement to payment, is digitally connected. “Technology determines whether an invoice is correct by matching it with the contract or purchase order,” explains Gustaf. “If approval can be completed within 48 hours, Finance can capture the discount. The CFO is effectively the striker finishing the opportunities, but good assists are essential.” Automation eliminates manual errors and provides transparency for both Finance and Procurement.

Introducing Dynamic Discounting starts with visibility. Finance teams can use cash flow tools to identify suitable suppliers and determine available liquidity. Gustaf recommends a phased approach: “Start with a pilot group of suppliers open to faster payments. Once you see how much margin it delivers, you can scale up.” Dynamic Discounting is especially relevant for the long tail of suppliers that together account for only 20 per cent of spend. “The top-tier suppliers, such as landlords or leasing companies, usually have fixed terms,” Gustaf explains. “The real potential lies within the remaining 80 per cent.

Ultimately, it’s the logical next step in Business Spend Management. “It’s the reward for efficiency in the process before the invoice,” concludes Gustaf. “Get that right, and you can literally make money by paying.”

Measuring the impact of smart payment strategies goes beyond counting discounts.

CFO's track KPIs such as:

• average days to approve and pay;
• percentage of invoices paid early;
• total discount value captured;
• cash flow improvement rate.

These metrics help organisations quantify how their payment strategy directly contributes to a stronger profit margin.

Consider an organisation that pays £50 million in invoices annually. If just one per cent of that spend is saved through early-payment discounts, it yields £500,000 in pure profit. “For companies with numerous suppliers, energy providers or manufacturers, for instance, the difference is substantial,” says Gustaf. “It strengthens both the bottom line and your reputation as a reliable business partner.”

Automation through the BSM platform ensures these savings are repeatable, traceable and compliant.

As more organisations embrace payment optimisation as part of the financial supply chain, dynamic discounting becomes the bridge between operational efficiency and strategic finance.

“It’s the ultimate result of full spend control,” says Gustaf. “Technology enables organisations to turn payment processes into a profit driver.”

This article was partly developed in collaboration with Controllers Magazine.