It should come as no surprise to anyone in treasury or finance that most companies are facing pressure to optimize their working capital management. One of the many ramifications of the recent financial crisis is a heightened awareness of liquidity risk across the board. Some businesses are focused on growing their cash reserves, whether in anticipation of future increases in interest rates or out of concern that credit may not be available to them, at any cost, down the road. Other organizations are spending cash on paying dividends to shareholders or reinvesting in the business. Either way, most companies are much more vigilant today about optimizing use of their working capital than they were a decade ago.
Some companies have responded to this post-recession reality by squeezing their suppliers and pushing out their payment terms. Although this strategy benefits working capital management at the customer company (the buyer), it obviously has the opposite effect on the seller, resulting in unintended ripple effects on the buyer/supplier relationship. Delayed payments put pressure on cash flow, making it difficult for suppliers to pay their bills, make payroll, or fund expansion. They might also need to incur borrowing costs while waiting to be paid. Since delayed payments can reduce the financial stability of the supplier organization, they can also add risk to the supply chain and may eventually constrict the buyer’s procurement options.
More and more companies are realizing that if they want to improve working capital management in a sustainable way, they need to seek out new strategies for procurement, payables, and management of their relationships with suppliers. In many forward-thinking companies, the accounts payable (A/P) manager is the agent of this change. In fact, A/P is the perfect place to focus efforts to improve working capital management. Since the function determines when invoices are paid, it is at the forefront of regulating cash flow.
A/P Change Makers
The accounts payable function is currently at a crossroads. The old ways of doing business aren’t working anymore. Manual processes for handling invoices are not only time-consuming and slow, but they can result in lost invoices and penalty payments. In today’s competitive global economy, few companies can afford to incur late-payment charges simply because their processes are out of date. Keeping up with competitors requires organizations to gather as much data about—and as much insight into—cash flow as possible. Manual processes fail to give companies adequate visibility into their impending financial liabilities, which can put them at a serious competitive disadvantage.
A recent study titled “ePayables 2014: The Quest,” from research and advisory firm Ardent Partners, found that there is a big discrepancy between traditional A/P departments and those managed by what Basware calls “A/P change makers.” Change makers are those accounts payable professionals who are implementing best practices, improving efficiency, and tearing down traditional functional silos. Their innovative approaches to payments are reducing the time required to process an invoice from 17.1 days to 3.7 days, while cutting costs from an average of $17.61 to $2.42 per invoice.
These cost- and time-saving benefits clearly contribute to the productivity of the A/P function, but there are other important benefits of A/P best practices, including improved accuracy and better visibility into cash flow. When the average time to process an invoice falls from 17.1 days to 3.7 days, that means A/P staff are aware two weeks sooner that they will have a certain cash outflow on a certain day, so they can plan accordingly. In best-in-class companies, anyone with appropriate permission can see, in real time, how much money will be needed to cover the organization’s financial liabilities day by day.
Cutting processing times, reducing costs, and eliminating costly errors enable more effective working capital management. However, the bigger opportunity is improving the way and timeliness of how cash comes in and goes out of an organization. When an organization has improved visibility and control over its cash flow, it can manage payment terms better and, in doing so, have a positive impact on working capital management.
A key driver of reduced costs, accelerated processing time, and greater visibility is automated invoice processing. According to Ardent Partners’ report, the exception rate handling for best-in-class A/P departments is 8 percent, compared with 16.4 percent in other organizations. Similarly, straight-through processing without any human interventions occurs about 50.3 percent of the time in best-in-class organizations, compared with 12.3 percent of the time in other businesses.
Achieving benefits on this scale requires more than just implementation of a new software package for the payments department. It requires true organizational change—which typically encompasses changes to processes, policies, and people’s behaviors and skills, as well as technology. Here are six key strategies that A/P change makers are harnessing to achieve world-class payment practices:
Establishing a holistic approach. By automating the process from purchasing through payment, leading corporate procurement and accounts payable departments are collecting valuable information that can impact supplier relations, discounts, and payment terms, among other things. Since a holistic purchase-to-pay approach provides a full view of the process, it enables managers to gain key insights into spend patterns and supplier trends, as well as better visibility into money-saving opportunities such as volume discounts. For example, from the information that an A/P department captures in its invoices, procurement might see that different offices around the world are individually buying from subsidiaries of the same parent company; this knowledge might enable the organization to negotiate a better volume discount. World-class companies are capturing key information at every stage from sourcing to payment to better manage working capital.
Tearing down the silos. In order to gain a holistic view, A/P change makers collaborate with others both inside and outside of the accounts payable function. They share spend, supplier, and payment information with other corporate departments. And in innovative companies, those other departments leverage the information that A/P provides to improve the intelligence of the organization overall. For example, treasury could use information on all the invoices being processed to better forecast and manage working capital.
By automating the A/P function, an organization gains improved visibility into its liabilities as they occur. This visibility enables management to determine how and when to pay their outstanding commitments and establish policies that dictate when to pay invoices and what discount to expect from suppliers in return for early payment. For example, a company might establish a policy to make an early payment for all invoices over $10,000 if the supplier will accept a 2 percent discount.
At best-in-class businesses, the procurement and A/P functions work together toward shared goals. At one leading energy company, the A/P department routinely shares insights with procurement, which enables the procurement team to identify savings opportunities and select preferred vendors. At the same company, project controllers leverage A/P information to calculate each project’s margins and ensure that it is fulfilling the terms of its contracts.
Creating a cross-departmental advisory committee. In order to ensure that they are identifying and sharing the information that is most crucial to each department, A/P change makers bring together leaders in treasury, procurement, finance, and other areas of the company to form a cross-departmental advisory group. Accounts payable staff seek input from this group anytime they are creating new policies, working to identify cost savings opportunities, or establishing new strategies for improving cash management.
Automating processes. Scan-and-capture and e-invoicing technologies can help an organization efficiently pull all of its incoming invoices into a centralized system. These technologies, when coupled with an automated payment workflow, are key to achieving the reduction in invoice processing times that the Ardent Partners research found in best-in-class companies. Automating the payment process makes cash flow more predictable for the treasury staff and enables A/P to time every payment more precisely and strategically.
In addition, the enhanced visibility of an automated A/P system can help companies develop dynamic discounting plans to avoid late payments and capture early-payment discounts. It also improves supplier relationships as different payment options become available.
By automating A/P, organizations can gain control over their outstanding invoices and become aware of their liabilities as soon as an invoice is submitted electronically by a supplier, instead of waiting for an invoice to be mailed and arrive a week or so later. With traditional invoice processing methods, invoices can often get lost or arrive after any discount opportunities have expired. But with e-invoicing, all invoices are received instantly after being sent, giving the buying organization the ability to negotiate dynamic discounts based on when the supplier wants to be paid. For example, a supplier can elect to be paid immediately in return for a 2.5 percent discount or to be paid in 20 days in return for a 1 percent discount.
New payment technologies help improve supplier relationships by offering the mechanism for suppliers to receive their payment instantly after they decide what type of discount to accept. The new payment technologies facilitate the exchange of payments between the buyer and supplier. Both parties can benefit: The supplier can receive payment when it wants, and the buyer can elect to either use its own funds to pay the invoice or leverage payment technology to extend payment.
Measuring key performance indicators (KPIs). World-class organizations are focused on monitoring productivity and financial performance. They invest time and resources in selecting the right metrics—KPIs such as days sales outstanding (DSO) and days payables outstanding (DPO)—and use advanced analytics to gain key insights into their spend and cash flow. Analytics technologies enable them to identify financial bottlenecks, ways in which they might improve working capital management in real time, and ideas for accelerating cash-to-cash conversion cycles.
Every orgnanization needs to select the right metrics to ensure that payment processes are resulting in working capital optimization. Cost of capital and internal rate of return are two metrics that organizations might want to consider. Since cash flow is key, companies need to determine when and at what rate it makes sense to offer to pay early in exchange for a discount from suppliers.
With the insights they gain through analytics technologies, A/P change makers work smarter. They collaborate with the treasury function to balance payments and cash flow in a way that optimizes working capital while maintaining healthy supplier relationships. Best-in-class A/P organizations have a much higher proportion of invoices that are paid on time. At the same time, A/P change makers collaborate with the procurement team to ensure that they are taking advantage of volume discounts and taking other steps to maintain good supplier relations.
Leveraging the latest social, mobile, and cloud technologies. These technology trends have the potential to change how purchases are made, as well as how invoices are sent, received, and processed—which means they can have a big impact on trading relationships and cash flow.
Using a cloud-based business commerce network enables companies to instantaneously send and receive electronic orders and electronic invoices without manual intervention, eliminating the two-week lag that is typical for preparing, sending, and receiving paper invoices. Instantaneous transmission of electronic invoices enables A/P departments to be fully aware of all their liabilities in real time, so their organizations are able to plan and manage cash better.
There are a number of ways invoices can be sent via email, yet without the proper technology in place, sending a PDF invoice to a buyer does nothing more than shift the printing costs of that invoice from the supplier to the buyer. There is, however, software that enables companies receiving PDF invoices to automatically capture that information in their A/P systems. The benefits of true e-invoicing in the cloud are numerous: eliminating manual data entry, cutting down on delays in receiving invoices and instances of lost invoices, and greatly reducing errors.
Best-in-class organizations are also taking advantage of mobile technologies to meet the 24×7 needs of today’s mobile workforce. When managers and staff can view, review and approve invoices anywhere, at any time, they can expedite the payment process. The company won’t experience logjams whenever a key manager leaves town. Moreover, since mobile apps provide staff with access to their purchase-to-pay systems and data analytics anytime, any place, they enable complete transparency and visibility over the entire process.
A/P change makers are also using social technologies to create more open, engaging interaction, enabling companies to more quickly and effectively communicate with their suppliers. For example, using social technologies available on business commerce networks, A/P departments can communicate with suppliers in real time to address specific questions or concerns they may have about invoices or orders. The ability for buyers and suppliers to instantly communicate with each other, as well as have a complete history of the communications, fosters interaction.
Ongoing Search for Creative Solutions
Many businesses are concerned that if they implement new payment strategies to optimize their working capital management, they might also undermine the financial stability of their suppliers. However, new services are becoming available that can create a win-win scenario for both buyers and suppliers. They are simultaneously speeding up slow invoice and payment processing to ensure that suppliers get paid quickly, and extending terms for buyers. One of these is a jointly developed payment solution that combines MasterCard’s global payments processing network with Basware’s Commerce Network.
By continuing to think creatively—while employing holistic approaches that combine people, processes, policies, and automation—A/P departments can successfully implement change across their organization. A/P change makers are breaking down the traditional silos between departments to improve working capital, save money, and provide greater insights into ways that the organization can work smarter and more effectively. This drives value and business benefits not only across the organization, but also across the entire buyer-supplier ecosystem.
Bob Cohen is vice president, North America, for Basware, a leading provider of cloud-based purchase-to-pay and e-invoicing solutions that enable better buying, better selling, and connected commerce for organizations around the world. For more information, contact firstname.lastname@example.org.