Business Settlement Networks: The New Approach to Increase Earnings and Cash Return

By Tom Glassanos, Xign President and CEO

Decades ago, credit card networks transformed business-to-consumer commerce through electronic settlement of transactions and today, consumers and the companies they buy from would have a difficult time imagining life without “plastic.” Today, a similar transformation is occurring in the business-to-business (B2B) settlement arena with the emergence of business settlement networks.

A business settlement network such as Xign’s dramatically lowers the costs of processing and paying an invoice, but more strategically enables companies to unlock working capital through early payment discount programs and more proactive management of payables and receivables. By tapping the “hidden profits” in accounts payable to increase returns on short-term cash, the Xign Business Settlement Network is transforming corporate finance operations.

The Next Wave of Business Settlement

Financial settlement for business-to-business commerce involves the back office operations associated with delivering a purchase order to a supplier and processing and paying the invoice. With traditional paper-based processing, the financial settlement cycle can stretch from weeks to months, and involve a large number of invoices with errors. These problem invoices further complicate invoice processing and can double or triple settlement-related costs. More importantly, they limit the earnings opportunities from early payment discounts.

Numerous approaches have been employed over the years to streamline portions of the settlement cycle: Enterprise Resource Planning (ERP) systems, Electronic Data Interchange (EDI), imaging systems, Evaluated Receipt Settlement (ERS) and, most recently, electronic invoicing. While each of these solutions addresses a specific aspect of B2B settlement, challenges persist in enabling organizations to quickly realize the operational and working capital benefits of electronic settlement.

End-to-End visibility

The lack of end-to-end visibility for buyers and suppliers is a major limitation of legacy approaches to electronic settlement. In a paper-based world, suppliers have no way to track payment status in real-time.

Organizational alignment

The lack of focus on process excellence has thwarted efforts to transform financial settlement operations. Success requires organizational alignment across different departments that include accounts payable, purchasing, and treasury but too often these departments are not in alignment.

Constrained IT resources

In many organizations, IT is overburdened with multiple projects, including upgrades to financial/Enterprise Resource Planning (ERP) systems or installation of purchasing systems such as e-procurement, sourcing, and contract management, which are viewed more strategically.

Supplier participation

Supplier participation of electronic settlement initiatives is essential, but often challenging. Many suppliers were negatively impacted by an earlier generation of e-procurement systems, where the benefits were heavily weighted to buyers and the focus on suppliers was on price. Developing a strategy that articulates the substantial benefits of electronic settlement across the supply chain is a prerequisite for success.

Impetus for change

Finally, electronic settlement has been largely viewed as a tactical solution that streamlines a business process to lower operational costs. Largely overlooked in the analysis, however, is the significant positive impact on working capital from a business settlement network. The savings from optimizing working capital—anywhere from five to ten times the operational cost savings, according to Xign business case assessments with more than 100 Fortune 1000 companies—can improve net income by up to five percent.

Today, successful electronic settlement strategies require careful assembly and coordination of one or many of these techniques. Because many of these solutions are software-based and require heavy IT involvement, realizing the enormous operational and working capital benefits of electronic settlement remain out of reach for all but the most technically savvy organizations.

Emergence of The Business Settlement Network

The Xign Business Settlement Network overcomes these issues. As an on-demand service, the XBSN links buyers and suppliers over the Internet to automate “order-to-pay” operations for buyers and “invoice to cash” operations for suppliers. A business settlement network such as Xign’s facilitates the exchange of settlement-related documents such as purchase orders and invoices, provides electronic payment to suppliers along with remittance information, and facilitates early payment discounts to reduce days sales outstanding (DSO) for suppliers while reducing buyer spend.

Operational Impact: A Win-Win

By linking the payables function on the buyer’s side with receivables operations on the supplier’s side, a business settlement network delivers compelling value to both trading partners. For buyers, the new efficiencies from automating previously paper-based and manual processes can result in significant cost reductions and compressed cycle times for payment processing. In addition, buyers have the opportunity to monetize discounts for early payment that were previously out of reach due to disconnected and inefficient payables processes.

Unlike an earlier generation of business networks built for electronic procurement, a business settlement network offers many incentives for suppliers to participate. Simply providing real-time invoice and payment status—a basic electronic settlement network feature—is a huge benefit.

In addition to business process improvements, companies on both sides of the transaction can improve corporate accountability and compliance through functionality such as electronic notification and detailed reporting. These features enable trading partners to follow the payment trail through the financial supply chain—from the instance an order is placed until the payment clears.

Furthermore, because it can be deployed rapidly with minimal IT resource requirements, a business settlement network lowers total cost of ownership (TCO). Sprint Corporation, for example, reported that it was able to reduce its TCO by 40 percent with this financial settlement approach.

New Paradigm for Optimizing Payables-Related Working Capital

For most treasury organizations, the prevailing working capital strategy has always been to “stretch” payables and earn interest off the float. While the extent to which payables are stretched varies widely by industry and vendor, this approach inevitably has two consequences: (1) it is one-sided, placing financial stress on suppliers, and (2) in today’s interest rate environment, it generates a very low return.

The Xign Business Settlement Network enables a buying organization to shift from a “stretch payables” model to an “accelerate for discounts” approach, to drive measurable increases in net income and achieve lucrative cash returns. According to a Xign survey of business settlement network suppliers, 85 percent of suppliers stated that they would always or occasionally accelerate payments for discounts. In discussions with more than 200 Fortune 2000 companies, however, Xign has found that only five percent of suppliers on average has discount terms. This discount “gap”—85 percent discount interest among suppliers but only five percent of suppliers on average offering discount programs—represents an opportunity for optimizing working capital.

By compressing the settlement cycle from weeks to days, the XBSN makes early payment discounts the norm, not the exception. Furthermore, not only can the buyer take full advantage of the discounts that are already in place, but the network provides the means to recruit a much larger percentage of suppliers into early payment discount programs.

With the XBSN, both trading partners have the flexibility to manage working capital more effectively based on the immediate needs of the business. Buyers can set and adjust benchmark targets to optimize cash earnings, cash return, and days payable outstanding (DPO). They can choose to stretch or accelerate payables depending on cash goals and DPO targets. For instance, in a quarter where cash is not as readily available, the buyer has the option of taking fewer discounts in order to maximize cash on hand. In another quarter where cash is more plentiful, the company can maximize its early payment discounts.

Suppliers have an incentive to offer discounts for prompt payment—the opportunity to accelerate collections and reduce their DSO. This can occur systematically or on an ad-hoc basis. For instance, a supplier might want to accelerate payment for a large order by offering a more aggressive early payment discount, to help fund a capital project or meet end-of-quarter financial goals. A business settlement network promotes these “dynamic” discounts and provides a mechanism for offering discounts outside the standard term period on a sliding scale.

Real-World Results

The financial incentives to buyers of early payment discounts are compelling. Consider a typical payables environment in which a $100 invoice, based on net 30 terms, is held for the full 30 days. Assuming an interest rate of 5 percent, the company realizes a 0.41 percent return for the 30 days of float. Compare this to an invoice for which the buyer and seller have negotiated a 2% discount for payment in less than 10 days, or 2% 10 net 30 terms. That 2% discount works out to an annualized return of 36%, or many times that of more conventional short-term investments, and this return on cash is risk-free.

A large global retailer achieved dramatic results with the XBSN by focusing on maximizing early payment discount opportunities across its supply chain. The company increased by a factor of ten the number of suppliers offering discounts. With this expanded program, the company is earning discounts on 90 percent of spend processed through the business settlement network.

It is entirely possible to establish early payment discount programs that are DPO and cash neutral. A Fortune 500 energy company based in the Northeastern United States proactively drove early payment programs to suppliers, increasing the number of suppliers offering discounts by a factor of nine and the discounts savings by a factor of five. At its current run rate, this energy company is on track to deliver a 36 percent annual return on short-term cash from early payment discount programs, and contribute a seven-figure sum to earnings. Furthermore, by extending its net terms, the utility was able to self-fund the program by extending DPO eight days.

Another Fortune 1000 retailer took a different approach to early payment discounts and achieved favorable results. This retailer had been making immediate payments to a large number of suppliers without payment terms. With the business settlement network in place, the retailer instituted a net 60-day payment policy to encourage early payment discounts. In addition to reducing purchasing costs from these discounts, the retailer has expanded DPO by 24 days and freed up $24 million a year in short-term cash.

The benchmarking data shown in Figure 3 illustrates aggregate results from participants in a business settlement network. Across the board, buyers are realizing a significant annualized return on their participation in early payment discount programs, with 36 percent being typical. By driving as much as 90 percent of business settlement network spend into early payment discount programs with a high rate of return, companies maximize their working capital to positively impact net earnings and company performance.

Summary

The Xign Business Settlement Network is leading the transformation in B2B commerce. As the world’s leading settlement network for business, Xign’s on-demand service facilitates the exchange of settlement-related documents such as purchase orders and invoices; provides electronic payment to suppliers along with remittance information; and promotes early payment discounts to reduce days sales outstanding (DSO) for suppliers while reducing buyer spend.