Accounts receivable management is an important component in controlling working capital. So wrote a colleague at sister company Diesis recently in an interesting blog. Completely true as far as I am concerned. However, a well-designed purchase-to-pay process is just as important to optimize working capital. And those who do this well can even turn Finance into a profit center.
Diesis approaches the subject primarily from the order-to-cash process and how that, if properly designed, can contribute to a better working capital position. In recent years, organizations have put a lot of energy into an optimal sales invoicing and collection process. Invoices are sent digitally on the day of delivery of goods and services; are clear and provided with all relevant features and reminders are also sent digitally on the day of exceeding the payment term. In other words, a well-oiled order-to-cash machine.
Really everything is aimed at receiving the money from the customers on time in order to be able to meet the obligations and not have to attract debt capital, with the associated costs. What should not be forgotten, however, is that an automated purchase-to-pay process on the other side also contributes greatly to this, provided the process behind it is well set up.
Payment discounts as a tool
The most important tool that the purchase-to-pay process incorporates to optimize working capital is leveraging payment discounts. Or perhaps better yet, negotiating higher payment discounts because the invoice can already be paid to the supplier on the day of receipt.
Suppose for 80 percent of your incoming invoices you are able to pay within 8 days, deducting 2 percent of the total invoice value. Or if you are able to pay within 1 day, deducting 3 to 5 percent of the invoice value. Then imagine the savings potential for your organization.
If you have the right control information and know you can meet these timeframes thanks to your automation, why not ask your suppliers to agree? Organizations with optimal automation of the purchase-to-pay process add significant value to the organization in this way, in part because they are dynamically able to realize discounts. The finance department can become a profit center in this way.
No PO, no Pay policy
Of course, some preconditions apply to play this game. More and more organizations have recently adopted what is known as a "No PO, no Pay" policy. This means that a purchase order (PO) must be created for every expense, and if no PO is recorded, then no payment is made. The thinking behind this is that with a PO, an invoice can be processed touchlessly. A good idea in theory, in practice I often see this go wrong.
It turns out that companies often create POs only after receiving the invoice or that the master data for the PO is already outdated during the ordering process. As a result, an invoice actually always deviates from the order and therefore still has to be sent past one or more colleagues. This leads to longer processing times instead of shorter ones. In short, to have a "No PO, no Pay" policy, performance/receipts should be declared before invoices arrive and orders should be of good quality.
Touchless processing
Then there are a few tips I'd like to pass along for achieving a touchless process. For example, using tolerances when automatically matching invoices so that small differences can be automatically posted to specific general ledger accounts. It is also useful to record recurring, predictable expenses (think monthly energy bills, rent or certain subscriptions) in a so-called spend plan. This way, they can be automatically matched, coded and thereby paid faster, if not immediately.
Bonus
All organizations need cash to meet their obligations. And as my colleague at Diesis describes, you have a number of knobs you can turn yourself to optimize your own working capital. With a well-designed process as a prerequisite, the most important tool is the utilization of payment discounts.
If your organization spends 100 million euros annually and you realize an (additional) payment discount of 2 percent as a result, the payback time of the automation project is a matter of a few months. As a bonus, you get your spend completely under management.
Want to know more?
My colleague Ronald den Hartog recorded a webinar where he discusses automatic invoice processing. You can watch it here. Of course, you can also contact me directly.
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Jeroen Rozeboom |
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