AP’s ability to add value to the strategic objectives of the business is greatly enhanced through technology. Leveraging technology enables AP to process invoices and payments in a more efficient and accurate manner while exercising greater control in the outflow of cash. Automation also captures real-time invoice and payment data allowing for more accurate forecasting and analysis of cash flow.
Establishing a working capital focus throughout various operational processes, including AP, takes diligence and a well-designed and detailed strategy. Enterprises must understand that the right capabilities must be in place in order to successfully execute an optimization strategy.
AP process automation and payment automation are key mechanisms that many organizations use today to optimize working capital. Getting suppliers onto an AP platform and enabling them to submit eInvoices and accept electronic payments is also an important part of improving the management of working capital. On-boarding suppliers is a crucial first step in removing paper and automating the transactions between a buyer and seller, thereby drastically improving connectivity, control and visibility into payables.
There are a number of different ways to automate the AP process and, depending on a specific department’s requirements and the solution selected, all or part of the AP process can be automated. However, according to research from Ardent Partners, best-in-class AP groups are more likely to automate the entire AP process, which consists of the following major phases (1) Receive – how an enterprise receives invoices (2) Process – how an enterprise validates and approves the invoice, and (3) Pay – how an enterprise manages and executes payments. Certain providers have the ability to offer automation around capturing early payment discounts and various financing options that can further support a working capital optimization strategy. These are typically accessible to those that have leveraged technology to a significant degree, and as a result, can maintain a higher level of visibility, transparency, and efficiency in the process. These technology solutions include:
- Dynamic Discounting – These tools allows buyer and sellers to dynamically alter the standard terms of payment. They enable buyers to offer early payment discounts to suppliers based on certain requirements; and they can manage their discount offers according to cash positions, allowing them to generate higher yields on available cash.
- Trade Finance (Supplier) – Once an invoice is approved, the lender pays the supplier early, minus a financing discount; the buyer then pays the full invoice amount on an agreed upon billing cycle. By leveraging this type of facility, the buyer can extend days payable outstanding and maintain a more consistent cash flow.
- Trade Finance (Buyer) – The lender establishes a line of credit for the buyer that is designed to extend payment terms. Financing is based on the receipt of the buyer’s approved invoices and the supplier’s offer to sell the invoice. The supplier is paid on the “net due” date and the buyer then pays the full invoice amount plus a financing fee on an agreed upon billing cycle.
Technology is a significant enabler and helps to establish a strong foundation within the organization. But in order for AP to support a working capital optimization initiative and ensure that it becomes a long-term, sustainable process, collaboration between AP and other departments, like procurement, must be encouraged and policies and procedures must be established. This includes monitoring AP metrics (such as invoice cycle times and percentage of invoices received electronically) and establishing policies around payment methods and discounts, supplier enablement, and the usage of financing instruments.
Organizations that lack a seamless P2P process typically see an erosion of value as they move across the entire process. The potential P2P performance gap that can exist between competitors warrants the attention of the CFO and the Chief Procurement Officer (CPO) as well as other procurement and AP leaders. For the average AP organization, the immediate opportunities are to drive efficiencies quickly, to become more operationally effective, to expand the scope of those operations for the greatest possible impact, and to ultimately become more strategically aligned with the greater business. Developing proactive payment strategies and pursuing dynamic discounting opportunities will go a long way in optimizing working capital across the P2P process.
Ardent Partners’ The State of ePayables 2017 report is chock full of valuable insights on AP and P2P technology trends and best practices. Download the new report here, and learn more about how AP can help optimize working capital.