Part 2 in the 4-part “Working Capital” series
At first glance, it seems obvious that working capital can be improved just by paying vendors later. But this is shortsighted. Cash discounts will often be lost, and taking advantage of the discounts might in the end be a better strategy for maintaining healthy working-capital reserves. Finding the right balance between cash discounts and keeping cash on hand is the key.
Today, the accounts payable (AP) team must make such decisions constantly. Accounts payable is no longer a department focused only on transactional activities; that role has evolved. In fact, the prerequisites for this evolution are the same factors I mentioned in my first blog as having a positive impact on working capital:
- Highly automated processes,
- Real-time insight in all payment-related information
- Tight collaboration with vendors
Finding the right balance
With real-time insight in payments and cycle times, it is possible to balance cash discounts against the impact of early payments on the cash position, and on working capital.
A highly automated and streamlined accounts payable operation will free AP staff to focus on value-adding activities. Process logic and intelligence and validation rules should be captured in the system to ensure a high degree of automation and minimize manual intervention. In combination with real-time insight, AP staff will have more time for analyzing cash-discount forecast and utilization and making payment decisions that will make a positive impact on working capital.
Collaborating to influence working capital
In a digital economy, collaboration is not an option but a must. It is the key to driving business process transformation. Tight collaboration with vendors can influence working capital through flexible negotiation over the timing of payments, for example.
The examples above show that besides automation, a single source of truth and collaboration between the different departments within the company and beyond are essential.
The next blog in this series will look at possibilities in accounts receivable.