Accounts Payable: A Vehicle to Drive Competitive Advantage
From: GTnews.com
Nasreen Quibria, Freelance Consultant - 18 Aug 2009
The article examines how improving the accounts payable process can help with optimising cash flow and financial management.
Uncertain economic conditions, coupled with a rapidly changing competitive landscape, have seen many firms face a challenging future. There are two ways for a company to improve profitability: increase sales and reduce expenses. The weak global economy continues to dictate that any improvements in profitability must be driven by improving costs - and the one variable businesses can really control is expenditures.
In response to the current protracted economic downturn, financial executives are refocusing their efforts on the efficiency of their business operations as a source of potential savings. Improving the accounts payable (A/P) process has become an increasingly critical function for optimising cash flow and providing financial management support in an era of tightening credit.
Most A/P departments are deluged with paper. According to the Aberdeen Group, 80% of invoices are still in paper format. Labour costs associated with handling paper are the single major cost component of A/P. This includes the tedious manual process of capturing, submitting, approving and paying vendor invoices. Eliminating paper in this process can cut costs, increase productivity and reduce errors.
Moving Towards Automation
Although paper-based processes continue to dominate the A/P landscape, there is a trend toward automation as ways to cut costs in order to help improve the bottom line. One tool that is gaining traction among large companies is account data capture solutions developed to convert the paper-based documents into data sent to the accounting or enterprise resource planning (ERP) systems. Companies spend significant resources matching invoice data to the original purchase order or contract and acquiring the multiple levels of approval to process an invoice. Large corporations have realised the benefits of utilising account data capture solutions, including increased efficiency in the processing of A/P and accounts receivable (A/R) data in addition to improvements in cash optimisation in terms of reducing days sales outstanding (DSO) and improving days payable outstanding (DPO).
For smaller companies accustomed to using Excel spreadsheets or other less sophisticated software to manage day-to-day operations, faced with set infrastructure costs and rising expenses, additional capital expenditure may not seem practical. Small business owners also have varied responsibilities and may not even have an entire department dedicated to A/P, which may be handled only during a dedicated time period. But continuing to maintain and process paper documents is inefficient and can create liability issues. In these situations it is more economical for small businesses to outsource their A/P process and focus on core business activities. A/P outsourcing solutions focus on optimising transactional processes like scanning, opening and data capture, and an outsourced solution eliminates the need for costly software or hardware purchases plus it frees up existing staff and other potential resources.
Other companies are seeking new ways to leverage existing or less expensive technology to stay competitive and improve operating margins by encouraging their suppliers to move from paper to electronic invoicing (e-invoicing). The invoice-to-payment (I2P) cycle is not always as simple as sending an invoice and receiving the resulting payment. The real cost is from exception handling and manual error corrections including dispute resolution. However, capturing invoice data electronically can lead to an efficient, lower-error invoice cycle, which in turn saves money. Reduction in operating costs in the A/P function can have the same impact on profit as an increase in sales.
An Affordable Solution
Co-ordination with trading partners to implement e-invoicing can provide an affordable, efficient solution that is easy to use without requiring a wholesale change or significant upfront capital investments in hardware, software, or training. Migration to e-invoicing can also facilitate dispute resolution and improve customer relationship management with faster response time. E-invoicing further offers financial visibility, reduces invoice cycle time, increases on-time payments and enhances cash flow management.
Some progressive organisations are looking past a siloed approach to the A/P department and viewing it as a strategic part of broader procure-to-pay (P2P) process. Historically, in all levels of enterprises, the A/P department has been a fragmented component of business operations burdened with paper and labour-intensive procedures. Emphasis on cost containment and productivity enhancements has prompted closer scrutiny of the A/P to meet these requirements. In the past few years, the role of the A/P department has changed dramatically, with A/P playing a large support role in helping to control, co-ordinate and analyse key business processes. Adopting enterprise solutions and re-engineering the A/P business process to fully integrate into the source-to-settle (S2S) process is an optimal way to reduce procurement costs and achieve economy of scale.
This more holistic approach to the entire requisition-to-payment process can achieve straight-through processing (STP) of business payments and allow A/P departments to send a single file to the bank or payment processor for least-cost payment routing via automated clearing house (ACH), wire, card or cheque. By automating and simplifying payments, the improved payment cycle created by electronic payments can enable businesses to manage cash more efficiently.
Most vendors charge penalties for late payments on outstanding invoices, costing businesses money and potentially damaging vendor relationships. However, as A/P processing becomes more streamlined and accelerated, companies can also take advantage of early-pay discounts. Leveraging the efficiency gains from automated payables and purchase card rebates, A/Ps can serve as a potential untapped revenue source, while enabling suppliers to enjoy the flexibility of speeding up cash flow through dynamic discounting.
Conclusion
In the current recessionary environment, every dollar counts. Businesses of all sizes and types are evaluating their existing practices and looking for ways to improve their bottom line. A realigned A/P function can position businesses to ride the shockwaves of the business cycle and create a strategic competitive advantage through sustained cost savings and improved working capital management to combat liquidity pressure and the credit crunch.
From GTnews.com 19-8-09