Cash Flow Management: How Your Procure-to-Pay Process Can Help

Blog - 3 May 2019

As we mentioned in last week’s blog, cash flow management should be treated as a major priority by organizations of all sizes, given how accurate an indicator it can be of a business’ long-term financial health.

The level of cash flow available to an organization can be measured by comparing current assets against current liabilities.

Examples of current assets include short-term investments, inventory, foreign currency, and prepaid expenses. Current liabilities range from accruals to current income tax liabilities to accounts payable to short term loans.

An organization’s procure-to-pay process can play a major role in improving cash flow management by optimizing the buyer’s cash conversion cycle without hurting their suppliers’ own cash flow needs.

According to PWC’s annual global Working Capital Study, working capital performance is improving from its lowest point in 2016, however, more work still needs to be done.

In terms of working capital performance at industry level, energy & utilities and industrial manufacturing lead the way in the reduction in net working capital days

 

cash flow management

 

A recent report by Ernst & Young also shows the level of improvement in cash flow management at a geographical level. Whilst both are improving, the number of organizations reporting improvements in their working capital performance in the US lags behind the numbers reported in Europe.

 

cash flow management

 

Most businesses aim to achieve a positive level of cash flow on a consistent basis, and by optimizing your procure-to-pay process, you will have a significantly better chance of achieving this. However, before undertaking any strategical changes to your P2P process, it’s important to note that there is a limit to how much positive working capital an organization should hold at any one time.

 

Finding the Right Balance in your Cash Flow Management

The main benefits of positive cash flow include improved liquidity, operational efficiency and increased profits. However, having an extremely high figure is not always necessary.

It can mean that there is more money within the company than is needed in order to fulfill its operations, that cash is not being invested in the correct manner, or that company growth is being neglected in favor of maximizing liquidity. Such instances point to poor cash flow management.

As mentioned, your procure-to-pay process can have a profound effect on your cash flow management and we’ve come up with six particular P2P strategies to help you on your way.

 

Procure-to-Pay Strategies to Improve Cash Flow Management

1. Effectively Manage Your Inventory

Optimization of inventory levels can have a major impact on your cash flow management.

By ordering too much stock, you may be left with expired or out-of-season stock if it fails to sell. This leads to a lot of waste and also high storage and insurance costs.

In contrast, insufficient stock can lead to you missing out on sales and frustrating your customers, who may subsequently choose to look elsewhere.

In order to improve your cash flow management, departments should collaborate to accurately forecast the levels of inventory needed and also to establish common rules over how inventory is managed.

Additionally, investment in a procurement automation solution can greatly improve cash flow. A streamlined and centralized purchasing process leads to a far more rigorous authorization process, preventing maverick spending and ensuring stock is purchased from preferred suppliers only.

2. Negotiate Early Payment Discounts with Preferred Suppliers

It is often the case that procurement and suppliers operate under very different agendas with regards to cash flow management. Procurement teams generally want to hold onto capital for as long as possible, whereas suppliers want to speed up the time customers take to pay debts.

Satisfying the needs of both is not easily done, however, one particular strategy that is helping to achieve this is early payment discounts.

Early payment discounts work when suppliers setting specific discounts on invoices in return for payment on specific dates. However, the number of organizations capitalizing on early payment discounts is still quite low.

 

cash flow management

 

A major reason why many companies miss out on early payment discounts is that their procure-to-pay process is littered with manual inefficiencies that greatly increase invoice-to-payment times.

 

cash flow management

 

An automated accounts payable solution enables businesses to accelerate their invoice lifecycle and capture early payment discounts more regularly than before. Depending on the size of your organization, the savings could amount to thousands or even millions.

3. Automated Invoice Processing

The processing of an invoice can be both long and expensive when done so manually, often taking up to 45 days and costing as much as $14.38 for a single invoice, according to Levvel Research.

Through Robotic Process Automation (RPA), however, organizations are significantly reducing invoice processing costs and lifecycles, which in turn, greatly improves their cash flow management.

The three key areas of improvement for these organizations, as they affect working capital are:

 

Invoice Data Capture

This is the process of receiving an invoice from a supplier, extracting the relevant data, and entering it into an ERP or finance system. Traditionally, this process is expensive, manual and often leads to data errors.

With an automated solution, technologies like Optical Character Recognition (OCR) scan invoices that arrive in the form of paper, electronic files, PDFs or emails, and transfers the relevant data to a finance system, ready for matching.

 

Invoice Matching

Manually matching invoices, POs and GRNs can lead to a number of challenges. Incorrect data, missing or damaged documents, and compliance issues can often disrupt the invoice processing operation, increasing costs and time involved. This affects the organization’s ability to pay suppliers quickly and capture early payment discounts.

RPA can read relevant data from documents to automatically match them without any human interaction. As a result, employees save a considerable amount of, protect against human error, and greatly improve internal and external compliance.

 

Invoice Approval

Manual invoice approval processes lead to a number of issues that slow down the entire approval process. Slow approval processing times result in early payment discounts being missed and sometimes late payment fees.

Pre-configured, automated invoice approval workflows, however, can manage the entire process with the help of RPA. Reminder notifications can be sent to speed up approval times and these invoices can usually be approved on the go, through mobile applications. As a result, organizations benefit from early payment discounts far more often and thus improve their cash flow management.

Check out our latest blog on RPA for further insights into how it is transforming AP.

4. Dynamic Discount Management Dynamic

However, large organizations dealing with complex supply chains and numerous suppliers often pay different suppliers under different payment terms. This is where a strategy called Dynamic Discount Management may be more beneficial than standard early payment discounts.

Dynamic Discount Management (DDM) works off supply and demand to determine the price that customers pay. With static early payment discounts, rates and payment dates are pre-determined. With dynamic discounting, however, buyers and suppliers can collaborate on how and when discounts are offered and accepted.

Early payment discounts decrease as payment deadlines approach, enabling buyers and suppliers to set and select discounts according to their own business and financial requirements.

Procure-to-pay solutions give suppliers greater visibility over the status of invoices, which increases their ability to offer more tailored discount rates for particular invoices. They also act to greatly improve the health of supplier relationships and supply chain efficiency.

 

cash flow management

DDM solutions are designed to reveal every possible savings opportunity by allowing buyers to view discount terms and upcoming due dates at any time.

5. Payments

For a long time, checks were by far the most common form of payment between organizations and suppliers. However, organizations are now starting to realize that by automating the payments process with electronic payments tools, they can significantly improve their cash flow management and capitalize on savings.

According to the Association for Financial Professionals, 51% of B2B payments in the US are currently conducted via check, however, by 2020, this number is expected to drop to as low as 34%.

Electronic payments are beginning to take over, with two of the most popular being Purchasing Cards (P-Cards) and Automated Clearing House (ACH).

 

Purchasing Cards (P-Cards)

P-Cards are particularly easy to implement and also prove to be the most successful payment method for capturing discounts, hence their growing popularity.

Organizations are significantly improving their cash flow management with card payments allowing for invoices to be paid and discounts captured on the same day.

Rather than having to pay suppliers within a typical 30-day period with card payments, organizations are often able to hold onto capital for longer, giving them more options over how to conduct their operations.

Furthermore, the costs associated with printing and mailing checks is completely eliminated with a switch to P-Cards.

 

Automated Clearing House (ACH)

The ACH Network is an electronic system that enables organizations to electronically collect payments for either single-entry or recurring payments. This is done by directly debiting customer checking or saving accounts.

The payments are created after the originator of the payment gives the organization permission to debit directly from their account. The originator’s bank also takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.

The recipient’s bank account receives the transaction, thus reconciling both accounts and ending the process.

Typically, ACH transactions cost the originator 29c. This figure is in stark contrast to the typical cost of $3 per check payment.

ACH is quite clearly a far greater source of cash flow than paper checks, and organizations are beginning to realize this. As mentioned already, by 2020, only 34% of organizations will be using checks, however, ACH payments will have grown to 45% by this time.

According to data from The Association for Financial Professionals, an organization that sends 15,000 checks each month spend roughly $540,000 each year. In contrast, organizations that send payments through ACH are saving $487,800. These organizations are using these savings to re-invest back into the company.

 

cash flow management

**Assuming a company processes 15,000 payments a month.

6. Procurement and AP Alignment

At present, one-half of organizations only capture early payment discounts some of the time and 16% never do. Organizations greatly improve their chances of receiving these discounts when their procurement and AP teams are tightly aligned. There are four key areas where the duo can work together to improve working capital:

  • When negotiating, procurement needs to be informed of a realistic invoice lifecycle time by AP so that the discount is actually achievable.
  • Once a discount has been negotiated, procurement needs to communicate the terms to AP and facilitate them to ensure that they successfully capture the discount.
  • AP can also have a hand in sourcing, a task normally left to procurement, by fuelling the process with insights into the budget and input on matters regarding the suppliers’ accounting team.
  • Procurement and AP are also a great pair when it comes to spend analytics, as both have a part to play in ordering, approving, and making payments.  In order to make this partnership work, both teams are encouraged to develop common goals and find a way to track progress together.

 

Cash flow management should be considered a top priority by all organizations given how the level of working capital available is a strong indication of the long-term financial health of the business. Poor management of cash flow can lead to organizational processes failing and an inability to expand. Your procure-to-pay process can have a huge impact on your cash flow. If you are interested in learning more about the procure-to-pay strategies that will significantly boost your working capital, download our eBook now.

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Posted by

Mary Duffy

Group Financial Controller

Posted by

Mary Duffy

Group Financial Controller