Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
What is Dynamic Discounting? Definition + Examples
As taught in the E-Auction Course For Procurement Professionals / ★★★★★ 4.9 rating
- Dynamic discounting is a flexible payment model where buyers offer suppliers variable early-payment discounts in exchange for accelerated settlement.
- Dynamic discounting leverages a digital platform to generate sliding discount schedules based on days to invoice maturity and current financing rates.
- Dynamic discounting enables buyers to earn risk-free returns on excess cash while helping suppliers reduce DSO.
What is Dynamic Discounting?
Dynamic discounting is a flexible model of earlier payment bills in which the customer, using its funds, offers suppliers the ability to apply a variable rate for an invoice in exchange for faster payment. Unlike static conditions such as “2/10 Net 30”, where the payment is made within a specified period, dynamic discounting allows the supplier to choose any date between the invoice and its maturity, with the earlier payment dates.
This approach does not require an external financier; i.e., the funds for accelerated payment come directly from the customer’s balance sheet position, which distinguishes it from the reverse factoring model. Dynamic discounting enables customers to achieve attractive, cashless returns on excess cash, while suppliers improve liquidity and reduce the average Days Sales Outstanding (DSO).
How Does Dynamic Discounting Work?
1. Buyer Issues the Purchase Order
The buyer and supplier agree on standard payment terms (e.g., net 30 days). Once the supplier delivers the goods or performs the service, the dynamic discounting solution automatically links the new purchase to the invoicing platform, ensuring all documents arrive in the correct format and location.
2. Supplier Submits the Invoice
The supplier uploads the invoice to the dynamic discounting platform or transmits it via their ERP system. The platform performs an initial data validation—checking quantities, prices, and terms, and, if any errors are detected, prompts the supplier to correct them before approval.
3. Buyer Approves the Invoice
After the invoice passes basic checks, the responsible finance or procurement professional reviews it on the platform to confirm all conditions are met. Once the buyer clicks “approve,” the invoice becomes eligible for dynamic discounting, though the payment date has not yet been scheduled.
4. Platform Calculates the Discount Schedule
The software generates a sliding discount schedule based on the days remaining until the standard due date. Its algorithm factors in market interest rates and the company’s internal policies to determine the optimal discount for each potential early-payment date, often adjusting in real time.
5. Supplier Selects Payment Date and Discount
The supplier sees a list of discount options tied to specific payment dates (e.g., 2.5 % for payment in 7 days, 1.5 % for 14 days) and chooses the combination that best aligns with their liquidity needs, cash-flow projections, and financing costs.
6. Buyer Executes Payment
On the chosen payment date, the buyer uses its cash reserves to fund the invoice, reduced by the agreed discount. The platform automatically posts the payment instruction into the buyer’s ERP or banking system, eliminating manual data entry while recording the early-payment “investment.”
7. Automatic Reconciliation and Reporting
After the payment is processed, the platform synchronizes the transaction with accounting and ERP modules and updates the ledger entries. Users receive detailed reports on savings achieved, DSO reduction, and return on invested cash, enabling continuous monitoring and optimization of the dynamic discounting program.
Example of Dynamic Discounting
Consider Acme Manufacturing, a mid-sized producer of industrial components, using the PrimeRevenue dynamic discounting platform to optimize its cash flow and strengthen supplier ties. Here’s how Acme and its key supplier, “SteelCo,” collaborate:
1. Purchase Order Issued
Acme’s planning team forecasts a surge in orders and issues a PO for €200 000 of steel parts under “net 60” terms.
As soon as the PO is approved in Acme’s ERP (e.g., SAP), it’s pushed automatically to the PrimeRevenue portal and SteelCo’s supplier dashboard, no manual emails or EDI transfers needed.
SteelCo immediately sees the confirmed quantities, delivery schedule, and payment terms, so there’s zero PO ambiguity.
2. Invoice Submission & Validation
On the shipment date, SteelCo’s billing clerk uploads the invoice PDF (or XML) into the PrimeRevenue platform.
The platform compares line-item details (part numbers, unit prices, quantities) against the original PO and the ASN (Advanced Shipping Notice). If, say, a quantity is off by one pallet, the system flags the discrepancy and sends a “needs correction” alert back to SteelCo within minutes.
Errors are caught up front—SteelCo fixes the typo, resubmits, and avoids payment delays downstream.
3. Invoice Approval
Acme’s procurement controller (Maria) is notified via email and mobile push that a new invoice is ready. She logs into the portal, quickly verifies matched details and delivery confirmation, and clicks “Approve.”
Maria typically does this within 24–48 hours of receipt, ensuring maximum discount options remain available.
Approval toggles the invoice status to “Eligible for Early Payment,” but leaves the original net-60 date untouched until SteelCo selects an early-pay option.
4. Discount Schedule Generation
The system pulls the current 3-month Euribor rate, Acme’s internal hurdle rate (2.5 %), and the days remaining until the 60-day due date.
It calculates discount percentages for each possible early-payment date. For example:
- Day 10 → 3.2 %
- Day 20 → 2.7 %
- Day 30 → 2.1 %
If market rates move, the curve updates in real time—even after SteelCo views it, ensuring both parties see the latest figures.
5. Supplier Chooses Payment Option
SteelCo’s CFO logs into their portal and sees the sliding-scale chart with both percent and absolute € savings.
They weigh their immediate cash needs, the cost of alternative financing (e.g., bank lines at 4 % APR), and the relative value of receiving funds sooner.
Opting for Day 15 at a 3.0 % discount, they click “Confirm Early Payment” and receive an on-screen confirmation plus an automated e-mail summary.
6. Early Payment Execution
On the agreed date, Acme’s treasury system (integrated via API) posts a payment instruction for €194 000 to their banking portal. No manual data entry—benefiting from pre-validated bank details and invoice linkage.
Each transaction comes with a digital signature and timestamp, stored both in the ERP and the PrimeRevenue ledger for compliance and SOX audit purposes.
7. Reconciliation & Reporting
Once the bank executes the transfer, the platform reconciles the payment, marking the invoice “Paid Early,” updating Acme’s cash-forecasting module, and closing the open AP item.
Insights Dashboard:
- Acme sees: €6 000 discount captured, DSO reduced by 45 days, and an annualized ROI of \~3.5 % on the €200 000.
- SteelCo sees: Improved cash flow projections, reduced reliance on expensive short-term loans, and a tighter cash conversion cycle.
- Continuous Improvement: Quarterly reports identify top suppliers by discount uptake and inform Acme’s working-capital strategy—perhaps reallocating funds toward new dynamic-discount opportunities.
Benefits of Dynamic Discounting
Conclusion
Dynamic discounting turns payment cycles into a win–win cash-management tool: buyers earn risk-free returns on idle funds, and suppliers choose when and at what rate to get paid. An automated platform links purchase orders, invoices, and approvals; generates a sliding discount schedule based on days to maturity; and lets suppliers pick their preferred timing. For example, Acme Manufacturing’s integration with SteelCo’s ERP gives real-time rates and automated reconciliation, speeding up DSO and removing manual steps.
Beyond efficiency gains, dynamic discounting boosts supplier relationships and supply-chain resilience. Buyers cut COGS or boost returns without outside financiers, while suppliers access reliable early payments instead of costly credit. Ongoing reports on discount usage, DSO improvements, and returns help finance teams fine-tune capital deployment and target high-value partnerships.
Frequently asked questions
What is dynamic discounting?
Dynamic Discounting is a flexible payment model where buyers offer suppliers variable early-payment discounts in exchange for accelerated settlement.
What distinguishes dynamic discounting from reverse factoring?
Dynamic discounting uses the buyer’s funds to offer early-payment discounts, whereas reverse factoring relies on a third-party financier to advance supplier payments.
How does dynamic discounting reduce DSO?
Dynamic discounting reduces DSO by allowing suppliers to choose accelerated payment dates at negotiated discounts, shortening the average time between invoicing and cash receipt.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
