On the supplier side we present some of the main arguments for automating and speeding up the AP process, such as:
- spending as little time as possible on this process (time & money savings),
- getting on top of the invoice workflow (control), and
- processing invoices as quickly as possible (prognosis, forecasting & budgeting).
Considering the real value of achieving the shortest possible lead time to getting a supplier invoice approved and ready for payment, is it really a business critical achievement with this cash flow theory in mind?
Let’s dig into some aspects of and gains from a shortened AP process lead time. After that, you can still choose to stick with your pay-as-late-as-possible approach or take advantage of some of the benefits below.
Early payment discounts
Once the global credit crunch occurred, many organizations took extraordinary measures to ensure a positive cash balance, including delaying payments, enforcing collection returns, curtailing inventory and even selling invoices (factoring). Regarding the latter, did you know that the global factoring market is now a €2 trillion market? This is money out of your pocket!
So let’s discuss the discount opportunities that often lie hidden in a delayed manual process. A common rebate starts in the range of 2 to 3 percent of the negotiated payment terms. This discount is often binary. Let’s say that a payment within 10 days will yield a 2 percent discount, but after the 10th day the discount is zero.
The other way to tap into this rebate is through negotiated dynamic discounts. This discount is offered on a sliding scale, with a full discount if payment is made on day one and no discount if the payment is made on the due date, with a sliding scale between the two end-points. We have earlier argued that one could reap a 25% savings on a yearly basis here. To read more about the mechanics of this concept, check out our white paper Dynamic Discounting Opportunities.
Getting the best supplier on board
It comes as no secret that all suppliers want to get paid as early as possible to reduce their DSO (Days Sales Outstanding). This is a factor that should not be neglected in negotiations. Depending on the supplier’s power, there are basically two outcomes for getting paid early that the supplier can offer you.
The first outcome is the commercial side. A common situation here is that the supplier has the capacity to sell to anyone, even to your competitors. Getting paid early is an enabler for the supplier to give you something back, such as a reduced price, more beneficial contract terms or some other giveaways on the logistical side.
The other situation is when the supplier is in the strong position of being able to choose its customers. An obvious example here is within the staffing sector. The contractor will very often be offered the same salary by all of the companies trying to recruit him/her, explained by the extreme price pressure this industry is under. Being able to offer quick payment terms thereby becomes business critical to attract the best contractors and therefore get the customers you’re trying to attract.
One thing that makes an accountant or CFO furious is when they think they have the cash position under control and suddenly a large amount is taken out of the bank due to an “unexpected invoice”. One could argue for structuring and demand approval of these purchases, but the reality is that very few organizations have this kind of control over their indirect spending. By having an invoice approved, controlled and processed on time, you can limit the surprise factor that these invoices have on cash flow.
Dare to make your liquidity pay off
One sector that is really good at maximizing its liquidity is the banking sector. It’s a misconception that it takes 2 or 3 days to wire money from one bank to another. Sweden is a case in point, because in Sweden you can wire money in seconds when using a third-party service but when using your bank it takes days. The bank is just using this time frame to maximize its liquidity.
The issue here is that if you don’t know the amount of money and when it needs to leave the bank, you won’t dare risk touching your liquidity. Obviously, this is not such an issue for smaller firms as it is for larger corporations.
Avoiding late payment fees
Late payment fees might be a conscious choice to keep your cash balance positive, but many times they’re not. When they’re due to a weakness in the process, it’s just throwaway money. The silver bullet here is obviously to use an efficient AP invoice automation solution, but even with a system in place you may still have some laggards in the authorization process. By measuring, tracking and optimizing the lead time for an approval, including your bottlenecks, you are encouraging a culture of getting invoices processed as quickly as possible. This way the AP team won’t need to be running through the hallways chasing approvals right before due dates.
So are you still convinced that the “pay-as-late-as-possible” approach is the right way forward? Even if only one of the abovementioned benefits of speeding up the AP processing lead time caught your attention, it might be worthwhile exploring what cost and time savings this would mean for your organization. If you have any questions or comments, don’t hesitate to contact me directly to discuss.