With ever growing pressure to extend payment terms, it is at least theoretically easier to be able to pay suppliers on time. If terms are extended from, say, 30 days to 60 days, the buyer has an extra month in which to match invoices, sort out payment files and push the button to get cash into suppliers’ bank accounts. Longer payment terms, therefore, can hide a multitude of sins within the payables function.
But this kind of ‘strategy of neglect’ means that the business could be missing considerable value-adding opportunities. The best businesses have accounts payable error rates that are a third of their per group average, according to recent data from The Hackett Group. And the overall cost of the finance function is around 45% lower for world class companies. The amount of time spent on collecting finance data is lower while the time spent on analysis is greater.
But there’s another element needs to be considered: invoice cycle times. “This topic is the of the financial supply chain, supply chain finance and dynamic discounting” says Nic Walden, director and procurement P2P adviser at The Hackett Group. “To really get the full benefit from the financial supply chain you need a strong, lean and on-time payment strategy and performance. And only 50% of organisations have looked at that topic around payment strategy.”
In short, an inability to process and approve invoices promptly reduces the opportunity for suppliers to take advantage of supply chain finance or for buyers to get early-payment discounts. “If it takes 28 days to approve but your terms are 30 days, you only have two days spare,” says Walden. “Your course of action is either to extend the terms – but there are challenges around prompt payment codes and regulation – or do some specific continuous improvement and process optimisation actions to improve, streamline and standardise your process performance. The most effective would be a combination of both.”
Walden adds that, in fact, one part of that strategy can help bolster the other: “Payment terms continue to get longer in Europe so to manage some of the pushback and take a more collaborative approach to key suppliers, one of the actions you can take is to use an early payment discounting or financing solution.” To do that, you need to be able to pay more quickly.
Ready to pay within three days
In fact, world class businesses are able to approve invoices for payment within three working days, Hackett Group’s research shows. So whatever businesses may do to their payment terms, it at least means that suppliers can, if they wish, get paid almost straight away. Or the buying organisation can increase its margins with early payment discounts that are greater than they would otherwise be if invoice cycle time was slower.
“The clients we talk to are focused on cycle time reduction or the number of ‘touches’ on documents,” says Andrew Jesse, VP financing services at Basware. “Coupling together a process efficiency programme with early payment offers is becoming more commonplace.”
What Jesse has noticed is that many businesses are reasonably good at handling the invoices from their very largest, most strategically important suppliers. “One manufacturer we’re talking to has an existing supply chain finance programme that they’ve taken to around 20 of their top suppliers. But they are at a breaking point right now because they can’t scale it beyond that. They are having to prioritise the top suppliers at the cost of the remainder of the supply chain’s invoices and so they’re not getting more suppliers onto the programme.”
Because businesses have different priorities (see box), Jesse explains that it’s important to be clear about what the organisation’s priorities are: “Is it working capital? Is it margin? Is it process efficiency or supplier relationships?”
Understanding your current state is the next critical step. Basware, says Jesse, is able to help companies with not only a traditional spend analysis, but also drilling into invoice cycle time and payment processes for each supplier. “We can compare their current payment terms against their cycle times to understand where payment performance will today allow for an early payment programme and where we need to drive process change or technology recommendations to help get these supplier invoices ready so they can take advantage of early payment.”
Companies’ top three priorities
1. Introduce the efficiencies they need to successfully run and deliver SCF programmes, such as accounts payable invoices processes and supplier onboarding efficiencies.
2. Working capital improvement: with that, companies are looking for a platform provider that can offer the full suite of services.
3. Companies that are in a strong cash position are looking to drive margin improvements by using discounting utilities.
Andrew Jesse, Basware
While it will be obvious to many, it’s worth emphasising that a speedier invoice approval process is almost certainly more cost-efficient. Faster cycle times aren’t an expensive luxury, they actually pay dividends. “Having a top performing accounts payable organisation today only has one third the number of headcount that an average organisation would have,” says Hackett Group’s Walden. “They are also much faster in the way that they execute.”
Digitisation and automation are critical to cycle time success, says Walden, as well as the deployment of workflow tools that route invoices through the organisation quickly and correctly. “Many organisations are still in this wonderful world of paper or PDF invoices going first of all to the budget-holder or original requester and then only eventually getting to the AP team – or stuck in a drawer,” he says. “Getting hold of the process right at the start is key.”
The biggest challenge, Walden adds, is to change the corporate mindset. “To drive full value from a financial supply chain programme you need to change your key metrics from just a focus around costs or quality to pick up invoice cycle time. That needs to be your new number one metric.”