Dynamic Discounting and Late Payments Directive


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Is your supply chain at risk due to late payments and restricted supplier cash flow? Does your company have cash earning next to nothing in this low interest rate environment?

In light of the recently effective European Union directive on late payments that mandates payment within a certain time frame, now is the perfect time to consider Dynamic Discounting which allows your suppliers to receive early payments and you to earn a good return on short term cash.

In this session we will discuss some of the key implications of the Late Payments Directive that you need to consider in order to comply, as well as how you can utilize dynamic discounting as a tool not only for compliance, but to earn significant savings as well.

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  • http://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000027248487
  • http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:72011L0007:EN:NOT#FIELD_DE
  • http://www.gazzettaufficiale.it/atto/serie_generale/caricaDettaglioAtto/originario?atto.dataPubblicazioneGazzetta=2012-11-15&atto.codiceRedazionale=012G0215&elenco30giorni=false
  • http://www.riksdagen.se/sv/Dokument-Lagar/Lagar/Svenskforfattningssamling/Lag-1981739-om-ersattning-f_sfs-1981-739/?bet=1981:739
  • http://www.legislation.gov.uk/uksi/2013/395/regulation/1/made
  • The next two slides show that- if not applied correctly- the EU directive will have negative (unintended) consequences for SMEs.This first slide shows that the directive will provide beneficial effects for those SMEs that supply public authorities. The examples apply to italian companies, but the concept equally works for any European enterprise.
  • For SMEs that operate purely in the B2B space the directive might force them to reduce payment terms to their large buyers, while SMEs will not have the sufficient negotiation strength to accelerate collections from their large corporate customers. The directive states that the 60 days terms applies in B2B contracts only if not agreed otherwise. It is likely that- until the economic crisis is not over- large enterprises will exercise their power to force smallers suppliers to accept tight conditions if they want to maintain the business.This is not in line with the spirit of collaboration and- foremost- the risk of default of SME suppliers is high and potentially disruptive also for their large buyers.
  • Dynamic Discounting and Late Payments Directive

    1. 1. Dynamic Discounting and the EU LatePayments DirectiveEarn Savings & Reduce Risk By Paying Suppliers EarlyJune 4, 2013 – 13:30 – 14:30Enrico Camerinelli, Sr. Analyst, AiteDrew Hofler, Director – Solutions Marketing, Ariba© 2013 Ariba, Inc. All rights reserved.
    2. 2. #AribaLIVEAgenda• IntroductionsDrew Hofler – Sr. Solutions Marketing Manager - Ariba, An SAPCompanyEnrico Camerinelli – Senior Analyst, Aite Group• Context – Payment Term Tension• EU Late Payments Directive and its impact on companies• Win-Win benefits of Accelerating Cash Flow to Suppliers• Q&A© 2012 Ariba, Inc. All rights reserved.2
    3. 3. #AribaLIVE© 2012 Ariba, Inc. All rights reserved.3“Many payments in commercialtransactions between businesses orbetween businesses and publicauthorities are made much later thanagreed. This is very costly forbusinesses.”DIRECTIVE 2000/35/EC“This Government is determined toback all those businesses who aspireto get ahead and take on morepeople. In the current climate, viablebusinesses can struggle to get thefinance they need to grow… ”David Cameron, UK PM (23 Oct ‘12)
    4. 4. #AribaLIVEWorking Capital TensionSituation and Objectives of Buyers and Suppliers© 2010 Ariba, Inc. All rights reserved.4Working Capital Tension• Buyers want to hold onto cash• Buyers extending paymentterms!• Need better return on cash• Need to minimize liquidity riskin supply chainBuyers• Suppliers want to be paid early• Suppliers getting paid laterthan ever!• Need better access to cash• Face significant liquidity risksdue to economic environmentSuppliers
    5. 5. ©2013 Aite Group LLC.Page 5Despite The Adoption And Application Of Directive2000/35/EC, Late Payment Is Still A CommonPractice Across The EU40 4139 40383656 5755 56524965676365 65612008 2009 2010 2011 2012 2013eAverage Payment Duration in Days (pan-Europe)Consumers Business Public sectorSource: Intrum Justitia, 2013
    6. 6. ©2013 Aite Group LLC.Page 6Source: Intrum JustitiaSource: Intrum Justitia, 2013Bad Debt Loss on Total Turnover (%)Write-offs for Late Payments Severely ImpactEuropean Businesses
    7. 7. ©2013 Aite Group LLC.Page 7a. Public authorities will have to pay for the goods and services that theyprocure within 30 days. Only in special circumstances and when expresslyagreed between the contracting parties, public authorities may extendpayment periods up to 60 days.b. Member States may, on an optional basis, extend the general rule of 30 dayspayment period up to a maximum of 60 days for public undertakings andpublic entities providing healthcare.c. Enterprises will have to pay their invoices within 60 days, unless theyexpressly agree otherwise and if it is not grossly unfair to the creditor.d. Enterprises will be automatically entitled to claim interest for late paymentand to obtain a minimum fixed amount of €40 as a compensation forrecovery costs and can claim compensation for all remaining reasonablerecovery costs.e. Statutory Interest rate for late payment will be the reference rate plus atleast 8 percentage points. Public authorities are not allowed to fix an interestrate for late payment below the statutory interest rate.Main Dispositions of Directive2011/7/EU
    8. 8. ©2013 Aite Group LLC.Page 8f. Member States will have to publish the interest rates for late payment sothat undertakings have easy access to these rates.g. Member States may continue maintaining or bringing into force laws andregulations which are more favorable to the creditor than the provisions ofthe Directive.h. To stop any abuse of negotiation power, companies have opportunitiesunder the Directive to challenge grossly unfair contractual termsand practices.Main Dispositions of Directive 2011/7/EU(cont’d)
    9. 9. ©2013 Aite Group LLC.Page 9Substantial legislative activity has been instilledCountry Number ofMajor LegalActs issuedBelgium No ReferenceAvailableBulgaria 5CzechRepublic11Denmark 2Germany No ReferenceAvailableEstonia 2Ireland 1Greece 1Spain 1France 4Country Number ofMajor LegalActs issuedItaly 1Cyprus 1Latvia No ReferenceAvailableLithuania 4Luxembourg 1Hungary 10Malta 1Netherlands 1Austria 1Poland 1Country Number ofMajor LegalActs issuedPortugal 1Romania 17Slovenia 1Slovakia 10Finland 14Sweden 3UnitedKingdom4Transposition of the Directive
    10. 10. ©2013 Aite Group LLC.Page 10• The Commission has recently (as of May 2013) received most of the nationaltransposition measures.• DG Enterprise and Industry currently waiting for its official translations. (as ofMay 2013).• Next step is to analyze all national laws from a legal point of view in order tosee whether these national laws can be considered as correct and completetransposition of Directive 2011/7/EU.• Cyprus, Italy and Malta have been the first Member States to notify to the ECits national transposition measure already in 2012.Transposition of the Directive
    11. 11. ©2013 Aite Group LLC.Page 1116 15209 9 1129 31906 7 61316 16B2B B2C G2BAverage Payment Delays (days, 2013)France Germany Italy Sweden UKBad term loss(% of revenue)20132. Intrum Justitia, 2013Transposition of the Directive - CountryAnalysis
    12. 12. ©2013 Aite Group LLC.Page 12554160B2B B2C G2BAverage Payment Duration (days, 2013)vs.Directive TargetsFrance Germany Italy Sweden UKSource: Intrum Justitia, 2013France - Significant Provisions
    13. 13. ©2013 Aite Group LLC.Page 13Payments deadlines• 30 days for Public sector• 50 days for health services• 60 days for all the restPayment period• Shall run from the date of receipt of the request for paymentRecovery Costs for Payments Delays• No need for official notice• Interest rate applied by the European Central Bank plus 8%• Allowance for recovery costs: 40 euroProvisions Relating To Overseas• Contracts in New Caledonia, French Polynesia, Wallis and Futuna IslandsB2B Contracts• 45 days end of month, to max 60 days• Payment periods can be longer if agreed by parties (e.g., for seasonal goods)France - Significant Provisions
    14. 14. ©2013 Aite Group LLC.Page 14Germany• Transposition deadline: No Reference Available554160B2B B2C G2BAverage Payment Duration (days, 2013)vs.Directive TargetsFrance Germany Italy Sweden UKSource: Intrum Justitia, 2013
    15. 15. ©2013 Aite Group LLC.Page 15Italy - Significant Provisions554160B2B B2C G2BAverage Payment Duration (days, 2013)vs.Directive TargetsFrance Germany Italy Sweden UKSource: Intrum Justitia, 2013
    16. 16. ©2013 Aite Group LLC.Page 16Italy - Significant ProvisionsPayment terms• G2B: 30 days• Can be higher, but not more than 60 days (e.g., healthcare)• B2B: Can be higher than 60 days if not grossly unfair to the creditor• Extended terms must be written and signed by both partiesInterests on delayed payments• Central European Bank reference rate plus 8%• B2B partners can agree on different rate• Applicable without explicit claim issued by creditorRecovery Costs for Payments Delays• The creditor is entitled without having to provide written notice• Amount of allowance for recovery costs: 40 euro• Debtor can oppose by proving that the delay in payment was determinedby the impossibility of performance resulting from causes not attributableto him
    17. 17. ©2013 Aite Group LLC.Page 17Sweden - Significant Provisions554160B2B B2C G2BAverage Payment Duration (days, 2013)vs.Directive TargetsFrance Germany Italy Sweden UKSource: Intrum Justitia, 2013
    18. 18. ©2013 Aite Group LLC.Page 18Sweden - Significant ProvisionsRecovery Costs for Payments Delays• Written notice by creditor is required• Compensation shall be paid (amounts vary as conditions apply)• Compensation for lost interests shall be paidGrossly unfair circumstances• Act does not apply outside of SwedenInterests on delayed payments• With Public authority: 30 days• With B2B partner: 30 days• Debtor can defer payment up to 30 days to investigate request• Reference rate: Riskbank interest rate plus 8%
    19. 19. ©2013 Aite Group LLC.Page 19UK- Significant Provisions554160B2B B2C G2BAverage Payment Duration (days, 2013)vs.Directive TargetsFrance Germany Italy Sweden UKSource: Intrum Justitia, 2013
    20. 20. ©2013 Aite Group LLC.Page 20UK- Significant ProvisionsExtent and Application• Regulations extend to England and Wales and Northern IrelandPayment terms• Public authority: 30 days• B2B: max 60 days• Supplier and buyer can expressly agree in the contract a later date notgrossly unfair (definition provided in the provisions) to the supplierRecovery Costs for Payments Delays• “The supplier shall be entitled to a fixed sum” (figures provided)
    21. 21. ©2013 Aite Group LLC.Page 21Revenue % of revenue 5,000,000 % of revenue 5,000,000> to Public authorities 30% 1,500,000 30% 1,500,000> to Large Companies 50% 2,500,000 50% 2,500,000> to SMEs 20% 1,000,000 20% 1,000,000Purchase (60% of revenues) 3,000,000 3,000,000> from Large Companies 20% 600,000 20% 600,000> from SMEs 80% 2,400,000 80% 2,400,000payment termsReceivables 2,500,000 1,166,667> fom Public authorities 360 1,500,000 60 250,000> from Large Companies 120 833,333 120 833,333> from SMEs 60 166,667 30 83,333Payables 550,000 250,000> from Large Companies 90 150,000 30 50,000> from SMEs 60 400,000 30 200,000Working capital 1,950,000 916,667Bank financing (80% of receivables) 2,000,000 933,333Cost of financing 5.00% 100,000 5.00% 46,667Working capital savings 53.0% 1,033,333Cost of financing savings 53.3% 53,3332012 2013http://www.linkerblog.bizcThe False Expectations From The EU Directive On LatePayments
    22. 22. ©2013 Aite Group LLC.Page 22Revenue % of revenue 5,000,000 % of revenue 5,000,000> to Public authorities 0% - 0% -> to Large Companies 80% 4,000,000 80% 4,000,000> to SMEs 20% 1,000,000 20% 1,000,000Purchase (60% of revenues) 3,000,000 3,000,000> from Large Companies 20% 600,000 20% 600,000> from SMEs 80% 2,400,000 80% 2,400,000payment termsReceivables 1,500,000 1,416,667> fom Public authorities 360 - 60 -> from Large Companies 120 1,333,333 120 1,333,333> from SMEs 60 166,667 30 83,333Payables 550,000 250,000> from Large Companies 90 150,000 30 50,000> from SMEs 60 400,000 30 200,000Working capital 950,000 1,166,667Bank financing (80% of receivables) 1,200,000 1,133,333Cost of financing 5.00% 60,000 5.00% 56,667Working capital savings -22.8% 216,667-Cost of financing savings 5.6% 3,3332012 2013http://www.linkerblog.bizThe False Expectations From The EU Directive On LatePayments
    23. 23. ©2013 Aite Group LLC.Page 23What Can Corporates Do?• The Directive is not retrospective• For contracts enacted before the legislation has become active, thepayment term can still be in excess of 60 daysSource: Intrum Justitia, 2013Risk Index- Europe
    24. 24. ©2013 Aite Group LLC.Page 24What Can Corporates Do?Strategy Financial Instruments Technical InstrumentsIncrease DPO Supply Chain Finance E-InvoicingReduce DSO Scaling discount rates Dynamic Discounting
    25. 25. ©2013 Aite Group LLC.Page 25What Can Corporates Do?• E-Invoicing: Widening the window of opportunityWeek 1 Week 2 Week 3 Week 4BuyerSupplierInvoice approvalEarlyPaymentOpportunityPay at due dateGet money based on approved invoiceWindow of opportunity
    26. 26. ©2013 Aite Group LLC.Page 26What Can Corporates Do?• Dynamic Discounts: Leveraging available cash
    27. 27. ©2013 Aite Group LLC.Page 27Aite Group: Partner, Advisor, CatalystAite (pronounced “eye-tay”) Group is an independent research andadvisory firm focused on business, technology, and regulatory issuesand their impact on the financial services industry.Enrico CamerinelliSr. Analystecamerinelli@aitegroup.com+
    28. 28. #AribaLIVEOpportunity: Process Efficiency Is Keye-Invoicing -- the First Step to Maximizing Discount Capture1%DiscountRateDays of Invoice Approval andPayment2%2010 30PaperInvoiceApprovals603% e-InvoiceApprovalsReduce invoice approval cycle time to: Drive out cost while improving efficiency Increase visibility into payment timing Maximize early payment discount savings Mitigate supply chain liquidity riskReduceCycle TimeExample discount term:2%10 Net 30
    29. 29. #AribaLIVE© 2012 Ariba, Inc. All rights reserved.29Buyer OffersEarlyPayment?SupplierNeedsCash?Supplier ResponseDynamic DiscountTypeYes NoWait for payment at maturitydate.-Yes Yes“I want to get paid earlyevery time!” AutomaticYes Yes“I want to pick theinvoice(s) I want paidearly, and choose whento be paid.”Ad hocYes Yes“I want to be paid early,but I want to make acounter-offer to therate my Buyer hasoffered!”Ad hoc(Supplier-initiated)No Yes“I want to offer up anearly paymentdiscount.”“Your invoice isapproved.It will be paid atthis date in thefuture.”Technology: Discount ProDynamic Discounting: Flexible, Pro-Rated, Self-service
    30. 30. #AribaLIVE1) Capturing missed discounts through Ariba’s smart invoicing approach2) Rapidly enabling more suppliers to increase the amount of spend under discount3) Introducing sliding scale dynamic discounts.4) Giving Visibility into Opportunity to right audience and providing Technology toact on it.Example:2% 10 Net 302%1%0%2.5%Best Practices for Dynamic DiscountingSupercharge Savings with Ariba Discount Management
    31. 31. #AribaLIVESuppliers Benefit from Early PayWhy many suppliers are eager to participate© 2012 Ariba, Inc. All rights reserved.31• ATM for Receivables• Automatic and Ad-Hoc EarlyPayment• Early Payment on Demand• Opt-in/out at Any Time• Control over Timing and Amount• Non-Debt Cash Flow• Reduces DSO“When we submit paper invoices, it cantake a long time to get our invoicesapproved. With Ariba, we get paid asquickly as four days, and the visibilityinto payment status is like gold. I lovethe Ariba service.”Joy Stoelting, Studio Manager, Big-Giant“By submitting invoices over the AribaNetwork, we have improved our cashforecasting and seen a dramaticincrease in prompt payments. Thesubstantial DSO improvement is ahuge advantage in this difficulteconomy. ”Trish Jackson, AR Mgr, Photo Craft
    32. 32. #AribaLIVE© 2012 Ariba, Inc. All rights reserved.32Dynamic Discount BenchmarksAriba Network Average Discount Performance
    33. 33. Questions?© 2013 Ariba, Inc. All rights reserved.33
    34. 34. #AribaLIVEPlease Complete Session Survey© 2013 Ariba, Inc. All rights reserved.34Find Sessionin ScheduleClickChoose oneRateSessionThank you for joining usClick Survey andSelect BreakoutSession Survey