oxygen

Oxygen believes that suppliers would be willing to agree to an early payment fee for early payment and below are examples of commercial arrangements that suppliers participate in today.

• In some European countries early payment is an established business practice known as ‘Skonto’ - this equates to a 2% fee being charged for payment being accelerated from day 30 to day 10
• Purchasing card, typically >2% - for payment 26 days early.
• SME Factoring, typically>3% for 80% of the invoice value (this is not typically valid for invoices that have payment terms of greater than 60 days)
• “Early payment discount programs and extended payment terms are the most widespread SCF practices today. On average, buyers receive a 1.83% discount through the Early Payment Discount Programs with their suppliers.” – Aberdeen 30/09/06

The core benefits provided by Oxygen include:

• Stabilising the supply base
• Improved bottom line performance
• Working capital improvement
• Commercial return on treasury funds
• Improved forecasting and transparency
• Transactional efficiency
• Improved control

Bank independence also provides total flexibility to the buying organisation since funding providers can be changed without new technologies being implemented or supplier contract adjusted. It also provides transparency between the cost of technology and processing versus charges for financing.

Yes, Oxygen’s technology sits on top of existing transactional procurement systems as an overall payment backbone, eliminating the need to upgrade or consolidate systems. It provides robust invoice and discount management capabilities that capture benefits at the point of a transaction, Oxygen fully integrates with and extends the benefits of existing accounting, procurement and ERP investments.

Oxygen leverages a proprietary payment processing platform that has been developed to provide open connectivity to buying organisations AP \ ERP solutions. (see more under the technology section of this website)

With time and resources similar capabilities could be built internally by an organisation however there are a number of considerations that should be understood prior to embarking on such a journey:

Control: What are the structural and accounting implications of owning and controlling such a solution?

Future proofing: Can the development or enhancement survive ERP upgrades; how will the technology keep pace with market developments? How much benefit could be missed during development? How will ongoing development in the market be replicated internally? Is developing a solution in this space a focus for the business? Will a 3rd party funding provider be willing to operate an internally built system?

Detailed design requirements: How is the discount calculated? Is the early payment fee a flat rate? Is the intention to operate a fee or discount based model? Do fees and discounts need to be dynamic?

Oxygen’s programme has a number of significant differentiators:

1. The programme is buyer driven and payables based. The buying organisation decides which suppliers participate and under what terms. Suppliers can take advantage of the buying organisation’s credit rating, payment on a certain date. Furthermore, the supplier benefits from improved cash forecasting, reduce receivables costs and lower cost of working capital.
2. Oxygen is bank independent, we provide the buying organisation with complete choice as to their source of funding. Oxygen focuses on optimising capital flows, process, technology and robust implementation.
3. An integrated technology platform, in addition to Early Payment Oxygen can also provide a Benefits Capture Programme.
4. Oxygen’s approach is designed to allow the buying organisation to choose which benefits its wishes to derive and provide the appropriate levers of control.

There is an absence of accepted industry definitions which can create confusion, not least since the buying organisations payables are the supplying organisation’s receivables and vice versa.

“Payables”

If payment of the invoice is received from the Buyer (or a third party acting either directly or indirectly on behalf of the Buyer) but which in either case there has not been any sale and purchase of any receivable then the SCF programme can be defined as a payables programme. 

“Receivables”

If payment of the invoice is received from a third party and there has been a sale (by the Supplier) and purchase by a third party of the Supplier's rights to receive payment (from the Buyer) in respect of a relevant invoice - then it is a receivables programme.

Programmes that look to improve working capital through payment are becoming increasingly prevalent, though many companies are implementing sub-optimal solutions. Unlike receivables programmes that place supplier in control, the Oxygen Early Payment Programme finally places the buyer in control. Organisation also often underestimate the following.

• These programmes are cross-functional and requires collaboration (Finance, Procurement & Treasury).
• Consultancy and expertise scarce. 
• Significant implementation effort.

The Early Payment Programme can be implemented as quickly as the systems are configured and the suppliers on-boarded, once a supplier is signed up the benefits begin to flow instantly.

The Benefits Capture Programme only starts to yield value once spend is flowing via the rebate management process and this requires the system configuration and negotiation to be completed in advance (which may require tendering).

Both programmes can be implemented in parallel since they share the Payment module of Oxygen’s technology.

To achieve the benefits of the programme it is key to educate members of the buying organisation to ensure a thorough understanding of Early Payment. This in turn can be consistently communicated to the suppliers.

A recent SCF report conducted by the Procurement Intelligence Unit drew the following conclusion. “Suppliers default position is to treat buyer initiatives with scepticism”

Oxygen recommends a rigorous approach to supplier on-boarding that is well resourced and adequately supported. The buying organisation should supplement existing resources with expertise (external or internal) to manage the upfront workload. As the on-boarding process matures and the majority of targeted suppliers are transacting, then this task can be run by the buying teams with appropriate tools and training. It is key that both organisations, buying and supplying, carefully manage change, simply going through the motions will not yield results.

Joining the Programme will be at the option of the supplier. It will be straightforward to present the programme as a financial support mechanism from the buying organisation to assist suppliers in these tough economic times by providing early payment at competitive commercial terms.

Ordinarily the suppliers would be financing their goods through other means; the discount required through the Programme will be substantially less than the typical cost of financing for the supplier thus providing the supplier with a monthly cash windfall.

While specific documents govern the usage of the Programme, the process of how suppliers provide goods and services to the buying organisation will not change. In fact, the Programme will increase efficiency in invoice processing and payment and pose no additional or onerous obligations on the supplier.

The Programme is flexible in terms of discount charges/rebates and overall revenue generation. The buying organisation decides whether it wants a full pass through of the cost savings to the supplier or if it wants to build in some level of profit as retained income. 

This is highly dependent upon the particular objectives and circumstances of the buying organisation. Buying organisations should seek guidance from their Audit partners to clarify any specific questions in this area.