The Neglected Metric In Corporate Finance

Chris Rauen

In a recent Shared Services Link webinar, Deliver Savings and Increase Profits: Top Working Capital Management Strategies, attendees identified their top KPIs relating to working capital management. At the top of the list was days payable outstanding (DPO), followed by cash flow gain, return on invested capital, and early-payment discounts earned.

One metric that did not get a mention was EPI: earnings per invoice.

That’s no surprise, as few organizations consider invoice processing as a profit center. For most companies, invoice management continues to rely on armies of people shuffling piles of paper. There’s too much time resolving invoice errors and exceptions, and few opportunities to capture early-payment discounts.

As trading partners turn to business networks for real-time processing of electronic invoices, however, straight-through processing rates can exceed 90%. More importantly, an invoice becomes a valuable corporate asset, making positive contributions to the income statement and working capital. When coupled with a new form of electronic payment, where detailed remittance information is tightly coupled with the payment, the value proposition grows.

Let’s look at the potential income statement impact from electronic invoicing and payments, starting with the process improvements, using conservative estimates of the savings potential.

  • Invoice volume: 400,000 invoices a year
  • Invoices processed electronically: 70%
  • Cost savings per invoice: $4
  • Savings: $1.12 million

Next, let’s consider savings from electronic payments.

  • Payment volume: 200,000
  • Electronic payments: 70%
  • Cost savings per payment: $2
  • Savings: $280,000

In this example, process savings come in at $1.4 million. But there’s more opportunity for business impact. As a business network helps you achieve high, straight-through processing rates, you can now capture virtually all early-payment discounts, and extend discounts to new groups of suppliers that you would never consider when transacting offline with paper.

Let’s run the numbers for an annual spend volume of $3 billion.

  • Spend volume: $3 billion
  • Discount adoption at 10% of spend: $300 million
  • Average discount: 1.5%
  • Gross discounts: $4.5 million

At $4.5 million, that’s more than three times the savings from a more efficient invoice and payment process. Often, when building a business case for automating invoice and payment processes, these savings are not considered.

Finally, as part of this exercise, there’s an opportunity to improve working capital that many organizations also overlook. This involves payment terms. If your organization has a DPO metric below the standards of your industry, or if you have no clearly defined payment-term policy, you have an opportunity to standardize and rationalize your payment terms and free up working capital.

Let’s look at some more numbers.

  • Spend volume: $3 billion
  • DPO extension: 15 days
  • Savings per billion dollars per day of DPO extension: ~$2.7 million
  • Free cash flow: $120 million

Finally, if you earn 3% on that cash flow, that contributes another $3.6 million in earnings to your bottom line.

To recap, that’s $1.4 million in cost savings, $8.1 million in earnings generated, and $120 million in freed up working capital. Not a bad day’s work from fixing a broken payables process.

Learn more about how you can turn invoice and payment processing into a profit center and improve working capital.

Chris Rauen

About Chris Rauen

In his role at SAP Ariba, Chris Rauen educates procurement, finance, and shared services professionals on the business value of accounts payable automation, procure-to-pay transformation, and collaboration via business networks. Chris has addressed these topics at finance and shared services conferences, in articles for trade and business publications, and in blogs for online communities. Chris has more than 15 years of experience in e-payables, and holds a B.A. in Economics from the University of California, Santa Barbara.