Today’s article, which will examine several opportunities that exist for AP to help quench treasury’s thirst for liquidity, is a continuation or Part 2 of this article from last week.

The Liquidity Impact of AP Automation

AP automation initiatives often focus on the inbound paper invoice (e.g., scan-and-capture invoicing and process automation), and drive value through enabling tactical efficiency. While this is valuable, and many AP teams need greater process efficiency, the advantage for liquidity management lies in extended value financial solutions that overlay the supplier payments process. The term “extended value solutions” refers to supply chain finance (“SCF”) and dynamic discounting—two technologies that can be leveraged to extend the value of supplier payments.

Dynamic discounting is an early payment discounting method that extends the discount potential throughout the entire payment cycle. Early payment discounts are often missed primarily because of lengthy invoice approval timelines, but also because sometimes buyers and suppliers disagree about when the discount period actually starts. Dynamic discounting eliminates both of these issues by offering discounts on every day of the payment cycle—on a sliding scale—right up to the contracted payment date. This discount percentage near the end of the period may be small (less than 0.50% is common), but even that small of a discount can add up when extrapolated across a pool of hundreds or thousands of supplier payments.

Supply chain finance is similarly powerful. SCF is an early payment discount method, but has more in common with factoring than traditional discounting. In an SCF program, buyers enlist the aid of a third-party lender to pay suppliers (less a small discount) at the point of invoice approval. The lender then takes on the liability of the unpaid invoice, and the buyer pays the lender the invoice amount either at the original maturity date or at the end of an extended period. SCF thus creates a “win-win” situation where the buyer gets to hold onto cash longer and the supplier receives payment faster. Ultimately, dynamic discounting and SCF are both powerful financial tools and, along with its data, can make AP a vital partner in treasury’s liquidity risk management activities.

Final Thoughts

Managing enterprise liquidity has always been a delicate balancing act between paying obligations in a timely manner and holding onto cash for as long as possible. Because of this, the treasury team needs to enlist all the help it can get—and access all possible information—to make the best decisions. AP has a vital role to play in this regard, as its extensive financial data and control over supplier payments gives it the ability to have a dramatic positive impact on the amount of liquid assets on hand. As such, it is crucial that treasury and AP work together on a supplier payment strategy, including leveraging extended value solutions, to ensure the enterprise has enough free cash to fund operations.


NEW Webinar: Transforming Accounts Payable for the 21st Century: Automation, Talent, and Intelligence

AP Can Help Quench Treasury’s Thirst for Liquidity (Part 1)

3 Ways Accounts Payable and Treasury Can Collaborate

Technology’s Impact on AP Reaching the “Next Level” of Performance

How is AP’s Performance Evaluated in 2016?

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