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3 winning strategies for optimizing cash flow with AP automation

AP Automation Best Practices
  • March 27, 2019
  • Chris Ogletree

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3 winning strategies for optimizing cash flow with AP automation

Optimizing cash flow with AP automation

When it comes to optimizing cash flow, companies are constantly seeking out ways to purchase fewer pens, cut back on travel, or make products with cheaper materials. An oft-overlooked opportunity for companies to increase cash flow is by evaluating and streamlining processes in critical business functions, such as accounts payable.

In typical middle-market firms, accounts payable consists of several employees, manual processes, and mounds of paper invoices stored in file cabinets and bankers’ boxes. Identifying opportunities, then implementing process improvements and best practices such as automated AP workflows, will reduce the time it takes to move an invoice through your payables cycle, enabling your company to take advantage of purchase discounts and maintain healthy relationships with vendors. You will also be able to repurpose your AP staff, allowing them to focus on value-add tasks.

Beyond paying a company’s bills, the AP function is key to managing working capital needs. Most AP departments have manual processes that require lots of paperwork, slow approvals and frustrated vendors wondering when they will get paid. The National Center for the Middle Market notes that companies can save millions by making AP processes more efficient.

For example, by improving a key metric like Days Payable Outstanding (DPO), which measures the number of days it takes a company to pay an invoice after receiving it, by just a few days can create significant free cash flow. The goal of managing DPO is to keep it from getting too high, indicating a company could be struggling to pay bills, or too low, implying the company is paying bills before it needs to and not taking full advantage of the repayment period allowed by vendors.

DPO has to be evaluated relative to the number of days it takes a company to collect money from its customers. If it takes a company 30 days to collect from customers and 35 days to pay invoices, cash is available 5 days in advance of payments due to vendors. Conversely, if the company receives money in 40 days with payments due in 35 days, the 5-day gap could create cash flow problems and disrupt other parts of the business.

So how can automating accounts payable functions help with optimizing cash flow and save your company millions of dollars? Here are three methods to consider:

Take advantage of early payment discounts

Vendors like to get paid. On time. To incentivize customers and guarantee payment of invoices, many vendors offer discounts for paying early. A common discount is 2/10, net 30, which means the vendor offers a 2% discount to pay within 10 days, otherwise the full amount is due within 30 days. When considering a company that processes thousands of invoices annually, 2% off each one adds up to significant cash savings.

The challenge here is that many discounts are left unexploited due to a lack of efficiencies in AP workflows. When an invoice is received, it can take several weeks for it to be approved, coded, paid, and mailed to a vendor. Automated solutions eliminate the time lost by electronically routing invoices for approval, a perfect solution for busy department managers who juggle competing priorities.

Managing relationships with vendors is key to negotiating discounts and payment terms. If discounts are not offered, extend an early pay offer to a vendor. It’s hard to believe that a vendor would refuse; the longer an invoice goes unpaid, the greater the chance of it never getting paid. Early payment discounts also benefit vendors because they can analyze customers’ payment trends, which is advantageous for projecting cash flow and making critical business operation decisions.

Utilize purchasing cards for rebates

A purchasing card (or p-card) isn’t just great for tracking expenses; it’s also a great opportunity for a company to get cash back for everyday purchases, such as office supplies, travel expenses, and utility payments. The amount of the rebate is dependent on your annual spend; on average, rebates are between 1-3%, though they can reach double digits for high-volume purchases.

For example, if your company spends $5,000,000 per year on a p-card with a 3% rebate, they will receive up to $150,000 cash back as a rebate, just for paying business expenses (which you’d have to do anyway). This is additional cash that you can invest back into your business to generate even more revenue and improve processes.

P-cards are a logical alternative to issuing paper checks when paying expenses. Check-writing in general has declined as banks and companies move toward digital solutions for handling transactions. Most digital payments occur instantly, eliminating both the money and opportunity cost that would be spent printing and mailing checks.

Know when to hold (and when to pay)

From a treasury perspective, companies look for ways to maximize returns and optimize cash flow through investments and cash savings. Improving cash position involves making good spending decisions at the right time.

Compare an interest-bearing account that pays 3.5% interest on deposits to vendor invoices that offer a 2% early pay discount. While paying 2% less on each invoice sounds like a win, the 3.5% earned from the bank is greater than the 2% saved by paying an invoice early. In this case there is no incentive for a company to pay invoices early – the better approach is to utilize the full repayment time to pay the invoices, hold on to extra cash, and earn higher interest on the bank balance.

Optimizing cash flow and improving accounts payable processes is beneficial to a business in many ways. Besides the cost savings and extra cash flow, AP automation makes paying bills easier for both companies and vendors. Companies can move invoices through a preconfigured workflow for approvals, coding, and payment, reducing the need for manual intervention and avoiding late payment penalties. As you streamline your processes, vendors get paid faster, creating leverage for you to negotiate more favorable payment terms in the future. The benefits of an automated accounts payable system extend to other areas of the business, with options like customizable cloud-based management reports and dashboards for informed, confident decision-making, stronger internal controls through transaction audit trails, and increased data accuracy stemming from fewer manual entries.

A Complete Guide to AP Automation

The average AP workflow is full of manual, time-consuming, hands-on tasks. Imagine what your finance departments could accomplish with automated AP processes. Read and download our complete guide for implementing accounts payable automation for your enterprise.

Rethink what AP can be

Chris Ogletree

Chris joined Goby as Inbound Marketing Coordinator in 2016, taking over generation and development of client-facing content, such as email campaigns, website administration, and marketing collateral. He has been an integral part in Goby's rebranding project and website redesign.

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