Optimizing of the Account Payable.
In today’s business climate, organizations in every sector are under pressure to do more with less. That means businesses cannot afford to squander opportunities to free up their working capital.
By giving you greater availability to the cash trapped on your balance sheet, a formal working capital strategy can deliver the added liquidity you need to fund growth, streamline processes, reduce costs, enhance service levels and seize new investment opportunities as they arise.
While there are numerous ways to free up working capital, I will focus on Account payable -AP.
- Reduce overall supply chain and inventory costs
- Accounts receivable & payable controls
- Free up needed cash through proper cash management
- Improve operational performance
- Make improved financial decisions
In addition to reducing overall supply chain and inventory costs, improving the purchase to pay process can add a visibility that allows management the opportunity to have better communication with the vendor as to where the items are in the delivery process, and payment to the vendor.
Common-Risk on Account Payable
A failure to adopt effective accounts payable processes can hamper a company’s ability to process invoices on a timely basis, take advantage of available discounts and set either longer or shorter payment terms with suppliers, depending on which are most favorable. These consequences can arise when businesses:
? Rely too heavily on error-prone manual processes to approve requisitions, scan supplier invoices and issue payments
? Fail to issue purchase orders for each new order
? Do not confirm if order deliveries match contractual terms or cannot easily access vendor contracts
? Lose access to early payment discounts by over-extending payment cycles or simply accept discounts without calculating the cost of capital outlay
? Neglect to take advantage of maximum savings through volume rebates or trade spend initiatives
? Incorrectly load supplier and/or contract information into master data files
? Lack processes and systems to prevent late payments, under- or over-payments, duplicate payments or missed payments
While each business must adopt a customized approach to realize these goals, there are best practices that can guide the way which include:
? Centralizing accounts payable processing and reporting across the enterprise through a shared service environment to ensure all staff members adhere to common practices and standards and measure their performance against established business metrics.
? Moving towards a paperless processing environment. Although electronic data interchange is not for everyone, businesses that automate their accounts payable systems by enabling electronic communication with vendors gain significant functionality advantages and savings through available discounts or rebates. With an e-Procurement system, for instance, you can communicate electronically with vendors and customers to automatically generate purchase orders (POs) for each new order, electronically validate and accept invoices, approve requisitions, track goods received and pay invoices on a timely basis. Depending on the level of automation you select, you may even be able to scan invoices automatically, track delivery receipts and resolve disputes electronically rather than through manual follow up. For example use of customized ERP Microsoft Dynamics 365.
? Setting up supplier portals so that suppliers can electronically track the status of orders, delivery schedules, potential product shortages and payments received.
? Creating management workflows to enhance the efficiency of your accounts payable processes. Management workflows can help you identify and resolve system bottlenecks and streamline process hand-offs to improve liquidity management in the most effective manner possible.
? Strengthening purchasing approval processes by defining the level of management authority required to make various-sized purchases.
There are six main activities within the accounts payable function that, if optimized, can help you free up cash and strengthen your working capital:
Vendor selection process
Develop supplier performance scorecards for strategic vendors and leverage these scorecards during negotiation as a way to induce suppliers to improve product or service quality, customer service standards and/or price
If you are coming from a position of strength, negotiate longer payment terms
Regularly seek opportunities to negotiate better pricing as well. Strategies might include asking vendors to match lower prices offered to your competitors or negotiating for volume discounts
Supplier master data set up process
Ensure all service level agreements (SLAs) are accurately reflected in your purchasing and payables systems. Among other things, supplier master data should indicate product/service details, quality standards, delivery timelines, supplier responsibilities, and any regulatory compliance mandates that apply
Regularly update payment terms and the availability of volume discounts, trade credits or other ongoing or periodic rebates. If supplier contractual terms change or are renegotiated, the supplier master data must also be changed to keep pace
Properly store your supplier contracts. Document management systems can help streamline this process and simplify information searches
Contractual review process
Assign responsibility for data to a central master data team that can check for completeness, accuracy and compliance with standard terms. This team should also periodically review vendor performance to ensure vendors continue to meet their contractual terms
Include supplier contract clauses that pass accountability for fines and penalties to vendors where they are found to be underperforming in some respect
Complete periodic and timely vendor contract reviews, in addition to reviewing such contracts against industry standard terms
Ask your legal team to check vendor authorization limits, assess the appropriateness of contractual terms and confirm compliance with regulations
Procurement process
Issue POs for each new order so you can validate any orders received, lock in payment terms in advance and track invoices against existing POs to ensure suppliers bill in accordance with agreed-upon terms
Maximize your savings potential by exploring the viability of any available early payment discounts, volume rebates or trade spend initiatives, but keep in mind that you don’t need to accept all early payment discounts. If you don’t have the cash on hand or the capital outlay exceeds the benefit of the discount offered, it may make sense to pay later
Track payables outstanding by vendor and by payment terms
Set clear accounts payable metrics (such as frequency of invoices that match POs, percentage of invoices paid to terms and percentage of negotiated discounts captured) and adhere to them across the organization
When purchasing a new or riskier product, negotiate longer payment terms to increase working capital or ask to add the product to consignment stock rather than inventory as a way to maximize liquidity and reduce risk
Invoicing process
Set up a centralized processing office to ensure a standardized and consistent approach
Refuse to pay inaccurate invoices (e.g. errors in quantities, amounts, address, etc.). These should be sent back to the supplier
Process invoices on a timely basis and include a date stamp. Be sure to complete this process in line with defined internal service level agreements (e.g. process invoices within two days of receipt)
Avoid paying invoices early; without risking key supplier relationships, you should pay invoices only when they are due
Conduct a management review of the AP aging listing to determine appropriate follow-up actions
Develop appropriate channels and processes for exception reporting and handling ?
Implement an Electronic data interchange system that allows vendors to submit invoices electronically while enabling you to track invoices against their associated POs, validate and approve payments and maintain accurate payment records
Accounting & reporting process.
Validate supplier invoices against contract terms and their associated POs to ensure billing accuracy
Improve real-time reporting capabilities by automating reconciliations and ensuring they remain current
Follow up on and resolve unreconciled items on a timely basis
Have the same individuals prepare and review all reconciliations to reduce the likelihood of overpayment or duplicate payments
Post journal entries before reporting period cut-off dates
Apply payments to each invoice on the date they’re made to maintain system accuracy ? Properly track all payments made, not just vendor payments
Select a method of payment (i.e. cheque, EFT, credit card) that minimizes bank charges