Accounts payable (AP) technology can have a significant impact on the working capital situation of most enterprises, for various reasons. Not least of these is that an improved invoice-approval process increases visibility, which results in a better overall picture of the enterprise’s cash position. This is a good outcome for everyone involved, particularly given how focused enterprises have been, and still are, on cash position in the modern economic environment. In order to make this happen the way it should, however, there are a few technology considerations that AP must focus on.
What Features Should AP Technology Have?
There are a number of different ways to automate the AP process and, depending on a specific department’s requirements and the solution selected, all or part of the AP process can be automated. However, according to research from Ardent Partners, best-in-class AP groups are more likely to automate the entire AP process, which consists of the following major phases (1) Receive – how an enterprise receives invoices (2) Process – how an enterprise validates and approves the invoice, and (3) Pay – how an enterprise manages and executes payments.
Automating the entire process can be achieved by utilizing a single end-to-end solution or by combining different services and solutions together. Typically, an end-to-end solution will have the following features, which play a role in providing the level of control, visibility, and accuracy within the AP process that is required to have a significant impact on working capital:
- eInvoicing – Ability to create and submit electronic invoices or purchase order flips
- Scan and capture – Allows invoices that are submitted in paper format to be converted into an electronic format
- Automated routing and approval workflow – Configurable business rules that automate matching, validation, and routing of invoices and payments
- Payment automation – Ability to manage and execute various forms of payment, including checks and electronic forms such as commercial cards, ACH/EFT, or wire transfers
- Connected supplier network – Improves connectivity between trading partners, although not offered by all end-to-end solutions
- Self-service supplier portal – Not part of all end-to-end solutions, a supplier portal provides real-time visibility into invoice and payment statuses
These are not the only characteristics of an effective AP automation solution, but the ability to cogently move an invoice through the process – no matter the underlying technology – is the most critical part of automating the accounts payable workflow. Additional capabilities include data analytics and reporting, which can allow enterprises to analyze the invoice-approval process and look for efficiencies, as well as communication tools that smooth collaboration between buyers and suppliers. There are also even more capabilities that can sometimes improve the enterprise’s working capital even more.
Additional Technology Functions for AP
Certain providers have the ability to offer automation around capturing early payment discounts and various financing options that can further support a working capital optimization strategy. These are typically accessible to those that have leveraged technology to a significant degree, and as a result, can maintain a higher level of visibility, transparency, and efficiency in the process. Some of these are:
- Dynamic Discounting – Allows buyers and sellers to dynamically alter the standard terms of payment. These solutions enable buyers to offer early payment discounts to suppliers based on certain requirements. Buyers manage their discount offers according to cash positions, allowing them to generate higher yields on available cash.
- Trade Finance: Supplier – Once an invoice is approved, the lender pays the supplier early, minus a financing discount; the buyer then pays the full invoice amount on an agreed upon billing cycle. By leveraging this type of facility, the buyer can extend days payable outstanding and maintain a more consistent cash flow.
- Trade Finance: Buyer – The lender establishes a line of credit for the buyer that is designed to extend payment terms. Financing is based on the receipt of the buyer’s approved invoices and the supplier’s offer to sell the invoice. The supplier is paid on the “net due” date and the buyer then pays the full invoice amount plus a financing fee on an agreed-upon billing cycle.
Although technology is a significant enabler and helps to establish a strong foundation, in order for AP to support a working capital optimization initiative and ensure that it becomes a long-term, sustainable process, collaboration between AP and treasury must be encouraged and policies and procedures must be established. This includes monitoring AP metrics (such as invoice cycle times and percentage of invoices received electronically) and establishing policies around payment methods and discounts, supplier enablement, and the usage of financing instruments.
Final Thoughts
The technology used in the accounts payable workflow can have a significant impact on treasury’s working capital optimization strategy. Whether a scan-and-capture solution that allows for the digitization of all paper documents, or a full eInvoicing solution that moves the enterprise into a completely digital workflow, the reality is that automating accounts payable can offer increased visibility into enterprise processes as well as provide further data points for treasury to manipulate the enterprise’s working capital. More data points can only, when used correctly, result in goals that are more likely to be achieved as well as lead to an enterprise that makes better use of its cash.
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Better Working Capital Optimization Through Technology
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