Changing the standard payment terms in supplier contracts is one way that procurement departments are impacting working capital. It was a popular strategy in 2009-2010 like when we wrote about with Meadwestvaco’s Chief Procurement Officer who helped extend DPO (days payable outstanding) from 22 days to 59 and it remains popular in 2013 like when the Wall Street Journal recently wrote about P&G’s (and other companies’ plans to free up billions of dollars by extending their supplier payment terms.
Extending payment terms is strategy that is usually driven by procurement and treasury and sometimes finance. Although we do not believe it happens frequently, there is a chance that if pushed too aggressively, this practice can harm supplier relationships and potentially disrupt the buying organization’s business operations. Also, what if your compay is the small fry without the leverage to extend payment terms. What then? Well, what about AP? Is (or can) your AP department making an impact on working capital? If not, why not?
One AP-led approach that can yield benefits in the long-run is to streamline the larger procure-to-pay process and, more specifically, streamline the AP process to ensure greater efficiency and visibility across the department. Visibility and accurate real-time data into current and future liabilities gives AP more control and precision around the outflow of cash, thereby improving the management of working capital. (Learn how AP can partner to make an impact in our article, AP + Treasury = Working Capital Optimization)
However, streamlining AP operations is a challenge especially when an AP group is operating in a manual and paper-based environment where it can be extremely difficult for AP to be a source for working capital improvements. Here are three strategies that can help to improve the impact that your AP department can have on working capital:
Migrate off paper, by any means necessary – Removing paper from the AP process should be a top priority for AP leaders because it drives efficiency. Take whatever method is most accessible and appropriate for your organization to move away from paper-based invoices and payments. One approach to consider is the multi-solution or portfolio approach to removing paper. In this strategy, groups may utilize eInvoicing and put in place strategies to maximize the number of invoices received in this manner while also deploying scan and capture capabilities to handle those suppliers that continue to send paper invoices. Establish migration goals and track the percentage volumes for both manual and electronic invoices and payments to ensure the targets are met. This strategy can impact working capital by speeding the average time it takes an AP group to approve an invoice and make a payment – helping to avoid late payment penalties and capture early payment discounts.
Make sure that an electronic payments strategy is part of any AP transformation initiative – An AP transformation effort should include a plan to migrate away from manual and paper-based payments. Electronic forms of payment or ePayments (e.g., card products, ACH/EFT, wire transfers) offer significant cost savings versus manual methods as well as improved security, more precision, and visibility into payments, all of which are a necessary part of optimizing working capital. A supplier enablement effort should include a strategy around improving the acceptance of various forms of ePayments among the supplier community. (Click here to read more about ePayments).
Develop a supplier enablement strategy – The above strategies only succeed in positively impacting working capital if they gain traction within the supply base. One of the biggest challenges to a successful AP automation initiative is enabling a majority of the supply base to submit eInvoices and/or accept or ePayments. Therefore, once a solution is selected, it is important to develop a plan to enable as many suppliers as possible in the shortest timeframe available. A strong and well-managed communication campaign can make the difference between a small percentage or a sizeable majority of suppliers being on-boarded. The execution of the communication is as important as the message itself: make sure that the right suppliers receive the right message.
