Following our series on trends in accounts payable, CPO Rising is going to take a look at predictions for the future of the AP function. Today’s installment, the third of four, will take a look at how Treasury may soon take over accounts payable.
One of the most pressing concerns for many enterprises is how best to optimize working capital. In large enterprises, the treasury department is tasked with answering that central question—how to manage enterprise cash?—based on which financial activity will provide the best results for the enterprise’s bottom line. Treasury can take actions that include placing money in the bank and getting the overnight interest rate, running a stock buyback, or even investing in other enterprises to name a few examples.
Treasury’s key concern in cash management is determining how the enterprise can fund growth over the next year … and even over the next decade. For large global enterprises, these types of decisions can have significant financial returns; consider that a return of 2% on $12 billion of working capital (a reasonable amount for a global enterprise), for example, is $240 million—no small return on investment. Because of this, it is incumbent on treasury to look at every possible method of optimizing working capital.
This includes accounts payable (AP), which is a critical part of any cash management strategy. AP is important not only for the cost and process savings to be had from optimizing the invoice approval workflow, although that is important, but also because AP is fundamentally a cash distribution function. There is significant capital involved in paying an enterprise’s suppliers—hundreds of millions of dollars in some cases—which means that treasury must, of necessity, be closely involved in managing payments in order to ensure that doing so is aligned to the enterprise’s greater cash optimization strategy.
In order to enable this scenario, treasury must be more collaborative with the AP function. The links between the two teams have the potential to strengthen over time as they work together to drive organizational results, and may even lead to a union of the departments in the future. This makes sense, particularly given the importance to cash management that proper payment scheduling holds. Treasury needs visibility into the invoice-approval process so that it has access to the financial data of when payments are due to which supplier or suppliers. Once treasury has this data, it is able to make more complete cash management decisions in the short- and long-term.
If treasury does not have complete and total access to the financial data involved in the AP process, then they end up making uneducated decisions in regards to managing enterprise cash. For example, days payable outstanding (DPO) is a critical metric to use in making the most effective use of an enterprise’s working capital. Since treasury is responsible for managing enterprise cash and liquidity, it makes logical sense that the treasury team would want input into payment terms in order to better understand when payments are being made and which payments can be delayed. AP holds this information, and this is perhaps where the accounts payable team can show the most strategic importance.
The AP process is already a critical part of managing enterprise cash; given that treasury already owns the capital and liquidity management portions of the organization, it only makes sense that treasury be more involved, and collaborative, with AP in order to ensure the invoice-approval process and payment scheduling matches with the other pieces of the enterprise’s greater cash management strategy.
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