5 Ways AP Transformation Solutions Improve Working Capital

Posted by Greg Bartels on Jul 7, 2020 10:18:21 AM
Greg Bartels

The economic downturn has raised the stakes for businesses to better manage their working capital.  

In 2019, the combination of slow customer payments, rising inventories, and record levels of debt resulted the first decline in working capital performance in several years, The Hackett Group reports. 

Then the global pandemic hit.

As a result, businesses are committing themselves to working capital optimization in a way that harkens back to the last recession.  Quick fixes such as increasing bank debt and funding from other external sources and leveraging supply chain financing, are not enough in this challenging climate.

AP Soutions Improve Working Capital

To better position their business as the world economy emerges from the crisis, many businesses are rethinking the way their accounts payable department operates and its underlying cost structure.

Businesses stand to gain $1.3 trillion in working capital with the right improvements, The Hackett Group notes.  Upper quartile businesses convert cash three times faster than median performers, pay suppliers 20 days slower and hold less than half the inventory of their lower-performing peers.

Cloud-based accounts payable transformation solutions are key to working capital performance.

Here are five ways that accounts payable automation can improve cash flow and liquidity:

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  2. 1. Digital technologies

    1. Businesses are implementing digital transformation capabilities to accelerate their payables processes. Leading accounts payable solutions aggregate all paper and electronic invoices onto a single platform, extract and validate invoice data, match invoice data against information residing in an ERP, digitally route any unmatched invoices for approval based on preset business rules and seamlessly upload data on approved invoices directly into an ERP.  Digital technologies such as digital mailroom, intelligent data capture, electronic workflow approval and exceptions resolution, and business intelligence can significantly improve efficiency and effectiveness, reduce transactional work, standardize and streamline processes, and provide more insight, The Hackett Group notes.  The faster cycle times provided by digital technologies also improves working capital by eliminating late payment penalties, creating more opportunities for early payment discounts, enhancing visibility into accruals and providing buyers with leverage during contract negotiations.  Automating legacy invoice processes often provides opportunities to generate quick wins.
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  3. 2. Real-time visibility

    1. In turbulent times, CFOs must closely monitor their organization’s cash position to avoid potential issues.  The graphical dashboard in an accounts payable solution displays real-time insights into critical metrics such as approved and pending invoices, accruals, spend by supplier, category and business unit, and historical invoice information.  Automation also provides finance leaders with instant visibility into invoices that are approaching their due date and pending invoices with early payment discount offers.  The reporting in automated solutions also makes the right Key Performance Indicators (KPIs) available to stakeholders such as the CFO, so that they can be used to drive action plans.
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  5. 3. Business intelligence

  6. Navigating economic volatility requires accurate cash forecasting. The business intelligence capabilities built into leading accounts payable solutions help businesses model cash flow and plan their needs, without IT involvement.  Modeling and forecasting cash with a business intelligence tool improves an organization’s decision making and helps identify potential risks so finance leaders can plan contingencies.
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  9. 4. Electronic payments

  10. Optimizing payments to suppliers is a key driver of working capital improvements.  Faster payments open the door to more early payment discount opportunities.  The revenue share from supply chain financing and the rebates earned from payments made via virtual card free up cash on existing revenues.  And the cost savings from electronic payments can lower a buyer’s cost of goods purchased. Migrating to electronic payments also makes it easier for buyers to optimize payment terms for suppliers and ensure the right terms are being offered for each category of supplier.  Some virtual card programs can extend a buyer’s Days Payable Outstanding (DPO) without impacting a supplier’s payment terms.  Terms for each payment method should be tied to the desirability of the payment to the buyer.  Leading accounts payable solutions seamlessly integrate with electronic payment platforms.
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  12. 5. Invoice financing

  13. While it is tempting to slow payments (hoard cash) during an economic downturn, businesses must carefully consider the potential impact of their actions on their supply chain.  In some cases, businesses must make decisions designed to help suppliers that may have more serious liquidity issues of their own.  The faster invoice approval cycle times provided by leading accounts payable solutions facilitate early payment discount and supply chain financing opportunities for cash-strapped suppliers.  In some cases, buyers will want to avoid early payments to preserve cash; that is where supply chain financing is key.  Buyers benefit from flexible funding options, lower cost of goods and a more stable supply chain.
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The pandemic has created a burning need to drive working capital improvements.  Businesses are making liquidity management and cash flow analysis a top priority.  This is a tall order for accounts payable departments with manual and semi-automated invoice processes.  Automation provides the tools businesses need to achieve better working capital performance and thrive post-pandemic.