Meaning and example - Dynamic discounting

To a non accountant, the concept of dynamic discounting is compelling. Pay your suppliers early in return for a discount. While interest rates are very low, that’s almost always going to give you a better return on your capital than leaving cash in the bank. But selling dynamic discounting to a CFO, or more particularly a treasury manager is not always straightforward. So how can you get the message across?

First, consider the way a CFO thinks. Accountants think in terms of key financial metrics. They steer their organization using a financial compass and use such tools as the balance sheet, cash flow statement and working capital. Now, without going into the depths of such matters, it is important to understand that cashflow is critical and anything that negatively impacts cashflow will be seen, in very broad terms, as bad. Cash flow is managed successfully by ensuring that customers pay quickly and suppliers are paid little slowly. It is not just about getting the best price you can for your products or services and paying as little as possible for supplies, it is also about paying out slowly and getting the cash in quickly. So when you say to the CFO “Let’s pay our suppliers more quickly …” you be cut off before you can explain the benefit. Paying quickly is anathema to the CFO – so don’t suggest it.

Selling Dynamic Discounting

You can get very complicated trying to explain the effect on DPO, cash flow and the balance sheet but it is best to keep it simple and remember – don’t mention paying early!

Selling Dynamic Discounting

The key metrics that the CFO needs to know is the discount and the cost of finance.  Accountants think in term of the cost of finance. When you mention early payment, the CFO thinks about operating costs and DPO but what he is really worried about is the cost of finance – how much money do I have to go to my bank for to fund my business. If the discount you get from a supplier is greater than the cost of financing early payment, there is a gain.

Early payment is like the elephant in the room. You know it there – everyone knows it’s there – but you have to avoid mentioning it until you’ve got your message across.

Understand your CFO’s drivers, talk his language, keep it simple and above all – don’t mention the elephant.

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