Not Your Father’s Treasury Department
The finance department in many enterprises has an unofficial hierarchy among functions. Near the top is the corporate treasury team, which is tasked with ensuring the enterprise has enough cash on-hand to cover ongoing operations and required business investments. But just like CFOs and Chief Procurement Officers, who have seen pretty dramatic increases in responsibilities over the last decade, Treasurers are getting more involved in a broader range of activities including earnings volatility management, currency and commodity price hedging, and financing M&A. Many of Treasury’s opportunities to add value are related to supply chain operations, but that is a topic for another day. However, for a treasury department to begin to tackle these activities, it must first make sure its house is in order – this means cash management and liquidity management must be optimized. Enter AP…
Not Your Grandfather’s AP Department
The typical accounts payable (“AP”) team, however, is often near the bottom of the finance function’s org chart. This is largely because of the perception that its only value lies in efficiently processing invoices and ensuring suppliers are paid on time. As a result, AP has historically been passed over for resource and enhancement investments. This is changing, albeit slowly.
This reputation is not without merit, as many AP teams do emphasize functional excellence above all else, but it is no longer the whole story. As data has become more vital to enterprise competitiveness, senior financial leadership has begun to realize that AP possesses a wealth of data that can have an impact far beyond internal performance management and process efficiency. It is this data that, when analyzed and converted into financial intelligence, that can allow AP to expand its sphere of influence beyond its traditional bounds and allow the function to affect operations far beyond the transactional level.
At Treasury, Liquidity is Job One
It is treasury’s job to ensure the business has enough liquid assets to fulfill all its short- and medium-term obligations. If a business does not have enough cash on hand to fund operations, there can be disastrous consequences for organizations of all sizes. For example, late or partial payments to suppliers can potentially slow and/or disrupt supply, a missed or late payroll can cause mayhem within the organization, and a late payment on long-term debt can trigger a default and bankruptcy.
The truth is that the strategies and approaches that treasury departments have used to perform this part of the function over the last twenty years have remained largely unchanged. This is a mistake. We believe that treasury departments at enterprises large and small should look for innovative ways to improve corporate liquidity and eliminate the risk of falling short. Treasury should examine all corners of the enterprise for ways to increase the liquidity, including in areas traditionally relegated to the back-office. This brings AP to the fore, and presents the possibility of the function taking on a more strategically valuable role in the enterprise.
This opportunity exists because AP is, at its core, a cash-distribution function. In fact, the supplier payments that AP controls are frequently the largest single non-payroll source of cash outflows in the enterprise. That treasury has often ignored this source of cash outflows is indicative of the perception that AP’s value lies only in creating cost savings through process efficiencies. The reality is that AP’s control over supplier payments can, and often does, make the function a vital partner in achieving the right amount of liquid assets to cover short-term liabilities. This is especially true because supplier payments also affect liquidity, and as such must be managed as part of an effective risk mitigation strategy.
Part two will examine the opportunities that exist for AP to help quench treasury’s thirst for liquidity.
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