The coronavirus pandemic has shaken up every aspect of lives around the world, and businesses are no exception. With lockdowns still in place, offices everywhere have been virtually empty for months on end, papers and checks piling up on desks. These offices, especially small and minority-owned businesses, are suffering from this lack of cash flow and stall in the economy. Because most companies are concerned about cash flow, they are holding off on paying their suppliers until the last possible moment, further snowballing the effect and exacerbating the cash flow problem.
Even worse, up to 90% of small and diverse businesses are at risk of being shut out of the Paycheck Protection Program, the US federal government program designed to give aid to small businesses in their time of need. This is due to both an exhaustion of funds before their applications are processed and these small businesses not qualifying.
According to a study conducted by Pay.uk, 63% of small businesses are affected by late payments, and are left with an average 27 days of cash buffer before the stunted cash flow becomes a very real problem. The Coronavirus Pandemic has only made this problem much worse. To this effect, businesses are forced to consider worst-case-scenarios, with 1 in 3 small businesses closing to never opening back up.
While some larger companies have committed to paying their small business suppliers early in an effort to support them, the majority are focused on the transactional nature of the relationship, and have put their own economics ahead of the future of these small businesses. Small business suppliers are then left on their own, forced to face the reality of stalled cash flow– and they are beginning to turn to variations of early payment programs for help.
How Coupa Can Help
Coupa can help your business increase cash flow during these uncertain 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 allows you to free up your cash and reduce your receivables. Your customer, on the other hand, is able to capture a discount and improve their profitability.
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 your business loses money or is far more expensive than other sources of capital.
There are two simple ways to figure out the right discount:
- Look at all your different sources of funding – for example, your cost of invoice financing or bank funding. Typically most small businesses are not able to tap into bank funding. So the only option is invoice financing or factoring companies. These companies charge anywhere from 18% to 24% APR’s 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.
- 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 high profit margin.
Be sure to do research on the industry and competitors to see how other businesses are operating. You can stay competitive by offering low early payment discounts. Leave yourself enough room to cover costs and keep a healthy profit.
Setting up Coupa Early Payment Solutions
Coupa makes it easy to customize your settings and discounts you want to provide to your customers. Simply log onto the Coupa Supplier Portal and go to the admin section. There, you can customize your preferences and save them for future use. Learn more about how it works here.