It has been a tumultuous beginning to the 2020s. First the coronavirus pandemic caused the largest disruption to our daily lives most of us have ever experienced, then inflation became another challenge just when things started to return to normal. The annual rate of inflation hit 8% in 2022, the highest rate since 1981. Inflation caused disruptions for both consumers and businesses, and the high rate of inflation drove a sharp increase in interest rates.
The increase in interest rates has had a profound impact on businesses of all sizes. The playbook from the 2010s with low-cost access to capital has been replaced by a new playbook with a more traditional focus on working capital management in a high interest environment.
Working capital is the difference between a company’s current assets and its current liabilities. Managing working capital revolves around a company’s cash on hand, its inventory and its accounts receivable and accounts payable. In a high interest environment, a primary goal of working capital management is to avoid taking on debt. Simplistically, the easiest way of improving your working capital is often increasing cash on hand by paying your suppliers later and ensuring your customers pay you earlier.
American Main Street SMBs are struggling with access to traditional working capital loans from traditional sources like banks and credit card issuers – only 39% of firms have access to such financing according to PYMNTS Intelligence.
How Coupa Can Help
Coupa can help suppliers improve working capital during these challenging times with our Early Payment Solutions. All you need to do to participate is offer discounts on your invoices, thereby providing an incentive for your customer to pay you early in return for a discount. This is a win-win situation for both you and your customer. The early payment is available within a few days and provides an immediate working capital improvement without any need for credit underwriting. Your customer also benefits by capturing a discount to reduce their cost.
Should you offer an early pay discount to your customers?
The key is to offer a discount that is big enough to give your customers an incentive to pay early, but not too big so that it becomes more expensive than other sources of capital.
There are two simple ways to figure out the right discount:
1. Look at all your different sources of funding – for example, your cost of invoice financing or bank funding. Many small businesses are not able to tap into bank funding and have to rely on invoice financing or factoring companies. These companies often charge anywhere from 18% to 24% APR which equates to about 4.5% to 6% discount on an invoice that is due in 90 days. Compare this to the discount that you will have to offer to your customer.
2. Start by calculating your profit margin using the formula [(Product Price – Cost of Goods Sold)/ Product Price] x 100.
For example, imagine you have a product that sells for $300 and it costs $210 to make.
Start by finding your profit margin: $300-$210=$90, and ($90/$300)$300=30%, so your profit margin is 30%.
Let’s say you wanted to give your customers a 4% discount, allowing them to save $12 on the product.
Then the equation would work as follows: $288-$210=$78, ($78/$300)100=26%, so with a 4% discount, you would still maintain a 26% profit margin.
You can try out different options and see what kind of discounts you can offer while still maintaining a sufficient profit margin.
Using Early Payment Solutions
Coupa makes it easy to offer discounts to your customers for early payment. Depending on how your customer has set up Early Pay Discounts for you, you can offer a discount either when you create your invoice in Coupa or after your invoice is approved. You’ll also be able to offer a discount per invoice, or conveniently set up the same discount offer to be automatically added on every invoice. Learn more here:
Early Pay Discounts – Before Invoice Approval
Early Pay Discounts – After Invoice Approval