When organizations can but don’t take advantage of prompt pay discounts, they’re not practicing sound financial management.  

During a recent Discovery Review, we worked with a healthcare system who made early payments to a vendor. This may sound smart in theory, but the healthcare system gave up over $26,000 in unused discounts on just 23 invoices. This resulted in a $1,000+ loss per invoice. The health system processed approximately 120 invoices a year to the vendor, meaning a potential annual loss exceeded $120,000.

How Unused Discounts Cost Your Organization

So, what went wrong in the example above? From human error to technological limitations, there are a number of factors that your organization should be aware of. In this specific example, The Audit Group found that:

• Accounts Payable processed the vendor’s invoices according to its standard procedure and expected the ERP system to apply the correct terms.
• The vendor’s early pay terms varied. Invoices contained the early pay discount percentage, which was between 5-10%.
• The ERP system could not accept multiple early payment terms, so the discount had to be manually applied to each invoice.
• Accounts Payable personnel overlooked the discounts and paid the non-discounted invoice amounts.

TAG Tips for Taking Advantage of Discounts

If the root-causes above sound all too familiar for your health system, try the tips below to make sure you are taking advantage of cost-saving discounts.

• Prioritize payments to ensure early payment terms are used.
• Review terms for the organization’s Top 50 vendors (in total spend) to ensure prompt pay discount information is entered into the ERP system and discounts are being applied when applicable.
• Identify those vendors with varying early pay discounts.  
• Train your Accounts Payable personnel who manage those vendors on how to manually process invoices and take advantage of discounts.

The Audit Group is a the only healthcare consulting firm that combines cost analysis, process improvement, and team development to grow your organization. Contact us to learn more about how our Discovery Review can improve your bottom line.