Sunday 25th February 2018,
Payables Place

How AP Can Affect Enterprise Working Capital

How AP Can Affect Enterprise Working Capital

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Accounts payable (“AP”) has a history of being pigeon-holed into a particular set of transactional duties, such as approving supplier invoices and scheduling vendor payments. This has created the traditional view of AP as little more than a tactical, back-office function. While true as recently as a few years ago, enterprises of all sizes have begun to realize the true strategic value that AP provides within the procure-to-pay (“P2P”) workflow.

A Cash Distribution Function at Its Core

As part of the P2P workflow, AP is tasked with approving supplier invoices and managing the payment of those invoices. What is little understood, however, is that supplier payments are frequently the single largest source of cash outflows in the enterprise. This makes AP, at its core, into a cash distribution function above all else. It is as a result of this position in the enterprise that savings created in accounts payable can have something of a “trickle-down” effect throughout the rest of the organization.

Whenever money is saved or discounts are captured on supplier payments, extra capital becomes available for treasury to leverage in other parts of the business. Supplier payments can even be scheduled in line with the working capital plan if AP and treasury collaborate on a strategy; this can result in a more effective use of the enterprise’s cash, as well as greater visibility into the organization’s total liquidity risk. This improved window into liquidity risk, which is one of the key areas that treasury manages, results from automating the invoicing process so that AP can communicate which payments are coming due and when, how, and where those payments are executed.

The AP Tactics that Affect Working Capital

There are several ways that AP can have a direct, and sometimes immediate, impact on the enterprise’s working capital position. The first method is through effective management of the enterprise’s days payable outstanding (“DPO”), which is a key measure of financial health. In general, a high DPO indicates financial health and means that the organization has more cash to put toward other operational needs. Managing DPO in line with working capital goals can have a significant impact because doing so shows that the enterprise manages its capital well and is able to pay its bills according to a schedule.

Part of managing DPO effectively is creating and following a supplier payment strategy which can include leveraging financial tools such as supply chain finance (“SCF”), dynamic discounting, and commercial cards as part of the organization’s overall supplier payment strategy. Supply chain finance, for example, leverages third-party capital to pay suppliers at the point of invoice approval while allowing the enterprise to delay payment longer than the contracted period. Dynamic discounting opens up the entire payment period to potential discounts, which allows enterprises with “slower” invoice approval processes to still benefit from early payment discounts. Lastly, commercial cards can be used as a financing mechanism that allows enterprises to “buy now, pay later” and delay payment an additional 30 to 45 days so organizational cash can general incremental interest. Each of these tactics, when used in concert, can help AP show its strategic value to the wider enterprise while also creating a tighter relationship with treasury.

Final Thoughts

It is easy to view AP as a mere source of tactical and back-office value. While this may still be the case in some enterprises, the reality is that AP can have a strong impact on enterprise working capital and deserves the strategic investment that is required to make it a more valuable piece of the enterprise.


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