Accounts Payable: Critical Issues and Solutions

by Lloyd Parata, Global 360, 25 October 2009

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topics:
Cash and Liquidity Management Finance and Banking

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accounts payable automation global 360 Lloyd Parata

In the current economy, visibility and control over the processes that drive a company's cash, accounts, net performance and working capital have never been more critical. And while inventory and receivables continue to be important levers for cash flow, cost-cutting demands are also causing a renewed focus on financial supply management. As a result, companies are taking the opportunity now to improve their procurement-to- payment process by transforming accounts payable (A/P). Those that are successful will make a significant contribution to cash flow and the bottom line.

Why focus on accounts payable? When it comes to buying goods and services, businesses face significant, costly, and flawed A/P processes, so improvements there can have a big impact for the corporation. Consider that accounts payable professionals process more than a billion business-to-business invoices each week, and 97% of those are still processed manually. The average cost to process and pay a supplier invoice is between $5 and $15, with 10% processed too late to be paid within discounting terms, and nearly 2% containing errors. Not only do these manual processes slow down productivity across the entire organization, long cycle times mean late payment penalties and an inability to take advantage of negotiated payment discounts.

Improvements in the A/P process itself, and better integration across functions in procure-to-pay, can help companies achieve a much higher degree of reliability and confidence in supply decisions, as well as lower their costs and maximize service delivery.

How the Economy Affects A/P

Most organizations have negotiated favorable terms and prompt payment discounts from their vendors, often 2-3%. The recession has further strengthened negotiating positions according to a recent global study done by independent researcher Loudhouse across chief purchasing officers and directors of large organizations. In fact, 4 out of 5 purchasing professionals they surveyed have seen unexpected supply management opportunities as a result of the economic downturn. More than 50% believe they are now in a stronger negotiating position with suppliers and 48% state they have more flexibility when it comes to reviewing existing contracts.

Yet organizations find that they are unable to actually process invoices within the designated time period and qualify for negotiated discounts. Further, the majority are unable to systematically prioritize invoice processing to ensure those with favorable terms are processed first.

Critical Issues Around A/P

In this environment, company leaders are increasingly looking to address five critical issues that surround supply management and their A/P processes:

How well can we manage to service level agreements to get vendor discounts?
Can we track invoices through the approval cycle?
Can we meet disclosure and audit mandates?
How do we tailor payments to respond to current business conditions?
How efficient is our exception handling and discrepancy resolution?

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