Monday 26th June 2017,
Payables Place

Why Managing Supplier Payments Matters

Why Managing Supplier Payments Matters

Efficiency rules in the modern business world, and cost savings are frequently one of the primary goals of executive leadership. As part of this objective to run an efficient organization, it is vital that the procure-to-pay (“P2P”) team drive as much value from their associated processes as possible. One of many ways to do this is through creating and managing a supplier payment strategy—a key method for accounts payable (“AP”) and P2P teams to drive greater financial and strategic value to the enterprise at large.

Supplier payments are frequently the largest non-payroll source of cash outflows in the enterprise. Thousands, sometimes millions, of dollars are used to pay direct and indirect materials suppliers each month—especially in companies that produce physical goods—and deciding when to make these payments can sometimes occur in a vacuum with insight into only a narrow view of the enterprise’s working capital position and/or overall financial strategy.

As a result, managing supplier payments effectively can lead to a significant impact on the enterprise’s working capital position. This includes capturing more early payment discounts, greater nuance in managing days payable outstanding (“DPO”)—a key measure of financial health, and richer cash forecasts presented to the executive suite. Each of these benefits is useful individually, but combined can begin to show how strategically valuable it is to better manage supplier payments.

A well-managed supplier payment strategy, in addition to resulting in a more efficient usage of enterprise cash, can also foster a more detailed understanding of liquidity risk. This increased understanding of the organization’s liquidity risk is incredibly valuable, especially to the treasury team, because they are tasked with ensuring that the enterprise has enough short-term assets in order to fund operations. In order to get this improved comprehension of liquidity risk, treasury and AP/P2P must work together to develop the overall supplier payment strategy and also ideally share information across functional boundaries. This information-sharing is a key piece of crafting a supplier payment strategy because treasury has visibility into the enterprise’s complete working capital position, and can more effectively place supplier payments into context.

Working with treasury to develop and managing this payment strategy puts AP in a much broader context in terms of organizational importance, and can also showcase the amount of operational and financial data collected through the invoicing process on a regular basis. In a business environment where decisions run on data and intelligence, leveraging the information that AP/P2P collects within the invoicing and payment processes can be enormously valuable to other functional stakeholders. Using this data in the context of a supplier payment strategy is easily one of the most direct and impactful roads that AP can take.

Final Thoughts

Because of its position in the enterprise, AP is uniquely suited to become a “hub” of financial and operational intelligence. Part of this position in the broader organization can lead to the AP team expanding its value beyond the borders of the P2P process and into the wider realm of cash management. It is through working with treasury on developing and managing the supplier payment strategy that this becomes most apparent. Managing a payment strategy that is aligned with working capital goals is a crucial task for the AP team, and one that can drive significant benefits for the enterprise at large, as well.

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