Keep it in, or outsource it?
Choosing how best to improve the efficiency of your accounts payable operation can be a difficult decision to make, but get it right and huge financial savings can be made.
For some, outsourcing the handling of accounts is an effective approach – but by its nature is not entirely risk free. This is because companies relinquish control of the invoicing process and subsequently miss opportunities to identify potential areas of inefficiency.
Of course, keeping accounts in-house places control back into corporate hands but is equally vulnerable to human error, data inaccuracy and system integration issues. All of which can waste time and money.
Making a change
That’s why when looking to improve the efficiency of accounts payable activity, you should first examine how it’s being managed, rather than immediately questioning the where.
After all, inefficiencies in the process itself will always be a drain on costs - regardless of whether you decide to outsource invoicing or manage it internally. Only by identifying where losses are being incurred can you start to generate real financial savings.
By taking this holistic approach and deploying a more centralised invoicing process you can improve communication across the business
These inefficiencies usually exist in paper-based processes that require manual handling and are, by their nature, time consuming and demand knowledgeable workers.
A recent report by Aberdeen Consulting showed that with effective AP automation, invoices take on average 3.8 days to process and cost £1.87 each.
However, for poor performers – comprising the bottom 30% of survey respondents – invoice processing takes over 20 days at a cost of £23.48. So for medium sized businesses processing somewhere in the region of 50,000 invoices per year, this would equate to an annual leakage of over £1m.
With this in mind, lets take a closer look at the benefits of a purchase-to-pay approach.
Automate it
Purchase-to-pay can sometimes be hard to crack, especially in a silo-orientated business where purchasing is distributed around the organisation and finance is seen as a back office function.
However, by taking this holistic approach and deploying a more centralised invoicing process you can improve communication across the business. What’s more, by breaking down the silos that exist in your organisation, you also minimise the number of touch points suppliers create through dealing with different departments, and prevent them manipulating each link for their own benefit.
And it’s only when you have this centralised control over accounts payable activity, that you can then start to manage the relationships and use them to your advantage.
Doing the maths
For example, one technique being used by some organisations is dynamic discounting. Having control over accounts payable gives finance managers a choice of how and when to pay.
And although the suggestion of paying suppliers early to improve your own cashflow seems counter-intuitive – and is likely to cause some internal controversy – the figures certainly add up.
Let’s assume that by offering to pay invoices in 10 days instead of 30, a company negotiates an average additional discount across its suppliers of 2%. That’s nearly six times what it would earn in interest by delaying payments.
Furthermore, the return on capital would be 2% in 20 days, or over 36% annually – a scenario which would please any CFO.
Even if the negotiated early-settlement discount was half of the above – just 1% – that’s an 18% annual return on capital. Whilst there is some discrepancy between achievable returns in practice and theory, there is no argument that the payoff achievable through returns on capital employed by better management of supply chain finance is vastly superior to those achieved by e-invoicing, scanning and the resultant head count reduction.
Back to basics
The key to efficiency lies in the processes themselves. If you have control over your accounts payable system, you have insight into the financial data that will allow you to identify opportunities to maximise the return on your capital. And with the right integration and a tight grip on your accounts, you will soon start to reap real rewards.
