Early payment discounts, dynamic discounting (DD), supply chain finance (SCF), the time value of money, the cost of capital, the cash conversion cycle, days sales outstanding (DSO), days payables outstanding (DPO), and much more all need to be taken into account when planning and implementing a successful payments strategy. The amount of data that needs to be taken into account can be daunting. However, the proliferation of cloud-based dynamic discounting, payments, and supply chain finance solutions have opened the door to a wider array of buyers and suppliers that are often eager to benefit from the ability to maximize DPO and DSO. All payment and receivables strategies require careful consideration of an enterprise’s technology infrastructure as well as its overall cash management objectives. As with any new solutions and processes, enterprises must develop a roadmap for implementation that includes understanding current processes and involves all relevant stakeholders.
Below is a list of recommendations that enterprises can use as a starting point when implementing or updating their existing payments strategy.
- Understand the DD, SCF, and a payment solution offerings in the marketplace and how such technologies can integrate into current cash management strategies. The rise of cloud solutions has made these technologies available to more and more businesses. It is imperative that the AP and finance teams understand the current solutions available in the marketplace, as well as how they can be most beneficially integrated into current cash management activities. This understanding can make the difference between a successful implementation and one that causes more headaches than it solves.
- Ensure AP has the tools they need to execute the new payments strategy/solution. Given AP’s command over supplier invoices, they are obviously a critical participant in the payment and supply chain finance processes. Because of this, it is absolutely vital that AP has the operational capabilities and technological knowledge required to successfully operate these programs. Every effort should be made to ensure that AP has all the tools and competencies necessary to be successful in the implementation phase and beyond.
- Integrate supplier payments into the enterprise’s cash management strategy. Supplier payments are frequently the single largest non-payroll source of cash outflow for a business. Finance teams should integrate the relevant data on current and upcoming payments into their cash management decisions if supply chain finance and payments are to have a demonstrable impact on working capital. Supply chain finance and payment strategies require the cooperation of multiple functions within an enterprise. Only when all sides of the process are taken into account do you have a starting point for success. AP can’t operate in a vacuum without the larger insights that finance can provide into cash management initiatives.
- Build a tight connection to the Treasury team. The AP team presides over one of, if not the biggest source of cash outflows in the organization. It is this reality that makes the AP team a valuable potential partner for the Treasury team. If AP is able to share supplier payment data, they can provide additional financial data points for Treasury’s working capital projections and other financial planning. Also by collaborating with Treasury, AP has a golden opportunity to show the strategic value it can add to the enterprise with respect to intelligently scheduling supplier payments and implementing a supplier payment strategy that maximizes working capital.
- Consider which suppliers will be given the option to participate in the SCF program. SCF traditionally was only offered to large suppliers, but today’s cloud-based solutions have made it possible to offer these programs to a much larger percentage of a supply base. This doesn’t mean that every supplier should be offered SCF – you need to work with procurement, treasury, and finance to determine which suppliers to offer it to ensure maximum working capital benefits for your organization along with an attractive option for your suppliers.
- Develop the analytical capabilities to turn payment information into business value. If ‘cash is king’ then ‘data is power’. Accounts Payable departments are sitting on a wealth of supplier payment data. However, just having the data is not enough. AP needs to develop the analytic data capabilities to turn the data into intelligence. Through detailed analysis, AP can make sense of the valuable financial data it collects and then share it in a way that other teams can use.
Conclusion
By implementing a well thought out supplier payment strategy, AP has a tremendous opportunity to achieve a rare trifecta in the business world. One where the company wins, the supplier wins, and the department wins. Companies can improve their working capital management, suppliers get access to the cash they need (when they need it), and AP is viewed more strategically by providing value-added financial intelligence that can be leveraged throughout the organization.
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