Getting Your Payables House In Order: The Remodel, Part 3

Robert Banther

Blog6_imageSixth of 8 blogs in the series. Read previous blog.

While the majority of home improvement projects are designed with the owner in mind, there are often others that hold sway over the ultimate value of your home and the efforts that you’ve put into it.

Now without pointing fingers, let’s just say that the wants and needs of my own family during a recent renovation eventually coexisted with my plans, but also brought significant benefits that pleased everyone.

I also see the same being true between accounts payable (AP) organizations and their respective “family members” within the company. Unfortunately, AP has historically been internally thought of as a back-office and purely tactical entity that provides little to no strategic value. However, times have changed, opinions have changed, and AP is stepping up and out of the traditional role and delivering real value to finance and the company’s bottom line.

Transforming AP into a profit center

As mentioned in the previous post, a by-product of fixing a broken invoice process is the opportunity to better manage your cash and working capital, a particular focus of the CEO and CFO. By enabling a touchless invoice process via a business network, AP is removing itself from a manual and exception-handling process to more strategic areas affecting the income statement and balance sheet.

But how?

AP’s domain is largely the invoicing and payment process, but their expertise and visibility into these liabilities have a significant impact on the company’s cash position.  The income statement, for example, is positively affected by moving AP to a more digitized and simple process. Simplifying a process that includes moving away from manual paper-based invoices, optimizing and rationalizing payment terms, and taking full advantage of early pay discounts.

On the balance sheet, there are benefits to extending days payable outstanding (DPO), which is all the rage nowadays with large corporates that AP has a hand in. Our studies, for example, have shown roughly $3 million in savings from just one day of DPO extension — an impressive amount in of itself.

DPO improvement and dynamic discounting can coexist

What companies are more commonly doing now is combining a payment terms rationalization and optimization project with a dynamic discounting program that helps achieve increased discount savings, increased DPO, and overall reduced supply chain risk.

By first defining a payment terms strategy in which they 1) Rationalize payment terms down to a few standard, consistent terms and 2) Optimize their payment terms by bringing them in line with industry standards, companies can increase DPO and also see an increased appetite for dynamic discounting from suppliers.  The need for accelerated cash for suppliers’ potentially yields significant and risk-free annualized returns, in the neighborhood of 24%-36% to the buying organization.

Now try finding that rate of return at the local bank with market rates still remaining at historic lows.

Unleash the potential

Extending payment terms and taking advantage of discounts helps your bottom-line, and benefits your extended supply chain as we’ve discussed.  However, AP needs to help finance unleash their cash potential by first automating and digitizing the invoice process to start with.

We can also take the optimization even further if AP collaborates more with procurement on the front-end of the sourcing and buying process.  There’s numerous advantages to having a single, and unified platform that can help enable a seamless and transformative process; among the most compelling is the ability to Run Simple.

Closing the loop with certain, simple, and secure payment

There’s one area that has yet to be mentioned: the final payment process.  An effective network payables strategy that combines smart invoicing, working capital management expertise, and discounting would not be complete without an effective electronic payment approach that brings simplicity, certainty, and security to your business payments.

In our next post, we will examine this innovative and award-winning electronic payment method that truly closes the loop in your procure-to-pay processes.

Robert Banther is manager of Solutions Marketing with Ariba, an SAP company.

Learn more about how to take your payables to the next level of performance in Ardent Partners’ research report E-Payables 2015: Higher Ground.

Robert Banther

About Robert Banther

Robert Banther is the Manager of Financial Supply Chain, Solutions Marketing, at SAP Ariba. He is responsible for connecting the voice of the customer back through the product development and launch life-cycle via crafting solution collateral and messaging, conducting primary and secondary market research, as well as staying abreast of Ariba's competitive positioning in the global marketplace.