With external funding tight and sales flat or declining at most firms, more corporate executives are looking internally to identify ways in which they can squeeze cash from operations -- or at least get a better handle on its flow. When you can't look to sales to replenish the corporate coffers, you need to be better stewards of the cash you've already brought in, says Thomas Bohn, executive director and chief executive officer with the International Accounts Payable Professionals (IAPP), an Orlando-based industry association.
Accounts payable (AP) is one area that's gaining attention. With the right AP setup, companies can better manage cash flow and liquidity, says Steve Mianowski, senior director of finance shared services with Broadridge Financial Solutions, a $1.6 billion solutions provider based in Lake Success, New York. They also can cut costs from the process.
The key, of course, is getting the right setup. Companies need operations that they can trust, as well as easy, immediate access to updated, accurate information. State-of-the-art AP departments are moving to a range of electronic processes, says Duncan Jones, a senior analyst with Forrester. Ideally, the supplier would send the invoice as a data file or an XML transmission. Once the customer received it, the data would electronically move into its AP and accounting systems, and the invoice would be routed, approved, and paid electronically. Neither customer nor vendor would generate paper.
To be sure, most AP departments have far to go before they come close to this ideal. In fact, 69 percent of invoices still are paper, according to several hundred respondents to the 2008 IAPP Member Benchmarking Survey.
At this point, leading firms are automating about 80 percent of their invoices, says Kurt Albertson, director of advisory services with The Hackett Group in Atlanta. This compares with about 20 percent for other firms.
As part of their efforts to automate the AP process, a number of firms are centralizing operations, with some implementing shared services centers. Moving to either an outsourced AP service provider or an in-house finance and accounting shared services center can cut AP costs by 40-plus percent, but only if tools like imaging and workflow solutions are introduced, and if the company hasn't significantly improved its accounts payable process, says Greg Sheppard, senior vice president of sales with NextProcess, LP, an Irving, Texas-based provider of accounts payable solutions.
Consider Broadridge's experience. After its spin-off from payroll processor ADP in 2007, management had about 6 months to create its own financial infrastructure, including an AP department. (During the transition, they relied on services from ADP.)
While the tight time frame was a challenge, it also provided an opportunity to design a process from the ground up. The long-term goal: "We want electronic in, electronic out, and no paper in the middle," Mianowski says.
As a starting point, Broadridge opened open a shared services center in India. About 95,000 paper invoices are received each year by Mianowski's department in New York. A handful of employees scan and electronically transmit the images to seven employees in India. These workers electronically check and enter the data on PO-based invoices into the system and route non-PO invoices for approval.
Centralizing the receipt of invoices is one key to an effective AP process, says Rakesh Shukla, co-founder of 170 Systems, Inc., a provider of financial solutions based in Bedford, Mass. In this way, management knows which bills are coming due and can track invoices throughout the approval process. Companies that instruct suppliers to send invoices directly to the approving manager lose all visibility, Shukla notes.
At Broadridge, Mianowski and his team are working to transition from paper to electronic invoices. Currently, about 5,000 invoices each year come in via email in PDF format. The image is automatically lifted and placed in a workflow system from 170 Systems. Mianowski is working with suppliers to boost this number.
Mianowski also will introduce an electronic invoicing system later this year, so that the invoice information will flow right into Broadridge's ERP system. Once the system is up and running, Mianowski expects to convert about 25 percent of invoice volume to electronic transmission within about 6 months. "The future is in data, and our secondary method of image capture and data punch will eventually be a very small percentage of our business," he says.
At the other end of the process, Mianowski is moving from paper to electronic payments. Within the next several months, Broadridge will settle about half of its larger invoices via ACH, and that number should jump to 80 percent over the next year. While these invoices account for just 20 percent of invoice volume, Mianowski says that his first priority is managing cash flow. With ACH, Broadridge will be in a better position to obtain term extensions, since the transactions settle immediately. "We'll get transactional efficiency over time as we gradually convert and begin to enroll new suppliers into ACH," he notes.
When the payment is sent, Broadridge also will electronically send the detail supporting it. This should cut supplier inquiries, Mianowski notes. "We want to reduce the noise in the process."
Technology Gains
As Broadridge's experience shows, technology is key to transforming and improving the accounts payable process. About two-thirds of respondents to the IAPP 2008 Member Benchmarking Survey indicated that they had adopted document imaging, 64 percent were paying electronically, and 35 percent invoiced electronically. Moreover, technology adoption didn't significantly vary by company size, the survey noted. This is a switch from 2004, when larger firms were further along the tech-adoption curve. The driver likely is the emergence in the AP market of software-as-a-service (SaaS) models, which makes the systems more affordable, the survey noted.
While all potential technology investments are scrutinized these days, the benefits of systems that can streamline the AP process increasingly are recognized by the folks holding the purse strings. "Processing paper-based invoices is very inefficient," Jones says. "Enterprises can't afford that level of inefficiency today."
Moreover, most executives urgently need to enhance visibility into cash flow, and technology can provide that, says Chris Juneau, senior director of segment marketing with Concur. He compares the environment today to that which existed immediately after the passage of Sarbanes- Oxley. The regulation was a catalyst for projects that promised greater control, Juneau says. Similarly, executives today are eyeing projects that let them know when cash is coming and going.
Concerns that suppliers will refuse to send electronic invoices are abating as they find that it helps to accelerate the payment cycle. This has grown in importance as the economy has weakened, says Evie Fletcher, accounts payable manager with RDO Equipment Co., a Fargo, North Dakota--based agriculture and construction equipment dealership with 50-plus locations in nine states. "Vendors know that the faster they get the invoice to us, the faster we can get payment to them." Currently, about 10 percent send their invoices electronically, and the number is steadily rising.
One up-and-coming technology: vendor Web portals that are hosted by customers. Vendors can log in to find out payment status and other things. While these have been adopted by just 8 percent of the companies in the IAPP survey, interest likely will grow, Shukla of 170 Systems predicts. "This is a huge boon for AP, where employees can spend 20 to 30 percent of their time answering calls."
Another application that's attracting interest is the use of technology to process nonstandard documents, such as invoices that are not supported by purchase orders. These one-offs significantly boost costs in accounts payable, as they're processed manually in a paper-intensive process, notes Joe Longo, director of product management with Autonomy Cardiff, a San Francisco--based provider of such solutions. Through what's known as "meaning-based computing," these systems read the documents, determine what they're about, and handle them.
Payment Stretching
Any discussion of AP's role in boosting corporate liquidity wouldn't be complete without considering the practice of simply delaying payments. Obviously, this leaves money in the customer's pocket for longer. And, the practice appears to be gaining prevalence. According a recent survey by the Credit Research Foundation, 79 percent of respondents experienced a slowdown in payments in February 2009, compared with 67 percent in November of last year.
Just how common this is likely to become is debatable, however. Even as they keep an eye on their own cash, most execs don't want to risk their suppliers' financial stability, notes Jones.
Moreover, most recognize that they can't impose their own rules without some repercussion, notes Allen Carney, vice president of marketing with 170 Systems. "The notion that you can unilaterally change the business relationship without it having an impact is silly."
So, companies are looking at new solutions. One is what's known as "reverse factoring," Albertson says. Here's how it might work: A company pushes payment terms from 30 to 60 days, while at the same time introducing a factor into the process. The factor takes on a single buyer's obligations to pay multiple suppliers. This is in contrast to traditional factoring, where the factor purchases most or all the receivables of a single supplier.
Another tactic is to "change the date at which the clock starts ticking," says Tom Dougless, North American practice director with consultancy REL. Rather than having the payment period start with the generation of the invoice, a buyer will work with its vendors so that the period begins only once it has received the invoice.
Clearly, buyers can improve their AP processes without relying on tactics that could harm their suppliers. "It is my approach to ensure that our process serves our suppliers well, which in turn benefits our business," Mianowksi points out.
AP Best Practices
Here are some guidelines for enhancing your accounts payable process:
1. Keep it simple. Avoid processes "with multiple loopbacks, and re-thises and re-that's," as these add time, says Rakesh Shukla, co-founder of 170 Systems. Along these lines, you want a single technology platform, chart of accounts, vendor master file, and so on, he adds.
2. Eliminate paper. Processing, storing, and finding paper consumes time, space, and money, notes Evie Fletcher, accounts payable manager with RDO Equipment Co. in Fargo, North Dakota. Use electronic data transmissions and imaging and workflow solutions to cut paper use.
3. Use key performance indicators. Executives who want to improve the job their AP department is doing need to focus on key performance indicators (KPIs), says Duncan Jones, a London-based senior analyst with Forrester Research. Examples include the average time it takes to process an invoice and the number of invoices each AP employee handles.
4. Bring stakeholders together. Truly improving AP requires bringing together representatives from procurement, treasury, and the supply chain, as well as accounts payable, says Kurt Albertson, director with The Hackett Group. "You have to get the four groups working together."