Editor’s Note: Over the next few weeks on Payables Place, we’re publishing some “best of” 2018 articles as we reflect on the year and prepare for the new year ahead.
Most people rightfully assume an unpaid invoice is a liability. After all, an invoice means you or your organization owe another organization or person payment for goods or services they provided to you or your firm. Payment terms are almost always stated on the invoice and typically specify that the buyer has a maximum number of days in which to pay the invoice. Makes sense, right? Nothing new here. This is the most common and conventional way of thinking about unpaid invoices. Invoices are liabilities, end of story.
But wait, not so fast. An unpaid invoice can also be an asset to your organization. Huh? We just said in the previous paragraph that an invoice is a liability. Now you’re saying that it can also be an asset? The reality is that an unpaid invoice can be both an asset and a liability, just not at the same time. It’s probably not a stretch to say that most people in Accounts Payable (“AP”) and Finance, or Academia for that matter, have never thought an unpaid invoice could actually be both an asset and a liability.
Let’s start by taking a look at the definition of an ‘asset’. In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset. Simply stated, assets represent value of ownership that can be converted into cash.
You’re asking yourself what does this have to do with AP and invoices? The simple answer is everything! The typical life cycle of an invoice is that it is received by the buyer, it gets reviewed, and then approved for payment. The moment an invoice gets approved for payment it actually morphs into an asset that can be leveraged for financial gain by the buying organization until the payment due date.
Organizations that have automated the AP process and can approve invoices quickly are in the best position to leverage these ‘assets’. According to Ardent Partner’s ‘State of ePayables 2018’ research report, best-in-class organizations can process and approve invoices in only 3.1 days. The typical payment term on an invoice is net 30. This means that best-in-class AP departments have created an asset their organizations can leverage for 27 days. In essence, AP departments have created something from nothing. They have taken a liability and turned it into an asset.
The next logical question is now that we have this asset, what do we do with it? The simple answer is you incorporate it into your organizations’ working capital management strategy. This represents a terrific opportunity for AP departments to improve the way they are generally perceived. It enables AP to move from being viewed as a purely tactical function to a strategic one. Talk to Treasury, talk to Finance. Work with these departments to create a strategy that best produces value from an asset that most organizations probably didn’t know they had or if they did, didn’t have a strategy in place to optimize.
In a future post we’ll discuss the different working capital management strategies and tactics available to organizations for producing value from approved invoices awaiting payment. In the meantime, it would be great to hear from AP and Finance professionals who are already successfully leveraging these assets described above for the financial benefit of their organizations.
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