If there’s one thing which finance departments agree on at the moment – it’s a need for greater corporate liquidity. The ways in which individual organisations attempt to achieve this is as varied as it is resourceful. As the banks’ squeeze on lending continues, and yields on business accounts remain dismally low, organisations need to be creative when exploring avenues for cash creation.
Hold on to What You've Got
The fallback position of many CFOs is to hold on to the cash that they have. At a time of economic crisis, this would seem logical, but the net result is often counter-productive. Putting a squeeze on suppliers in order to hold onto cash, can have a disastrous effect on the relationship as well as causing inter-departmental strains between AP and Procurement along the way. Worth it perhaps if a financial argument could be made, but compared to some of the alternatives, such a protectionist strategy just doesn’t add up.
Despite this, some observers argue that the average payment terms haven’t changed much in the last 20 or 30 years. Which means that despite opinion to the contrary, and in some cases, even legislative measures - if you work in finance and you have responsibility for the cash in your department, the overriding instinct is to keep it there for as long as possible. Of course it could be argued that if things haven’t changed in 30 years, do they really need changing? I would say yes, because if there are opportunities to add value to your organisation’s bottom line – who can afford to miss out on them?
Early Settlement Discounts
One of the ways to keep everyone happy is to try to capture early settlement discounts - the supplier gets paid early, the transaction has cost less – both in real terms, and in the intangible processing costs. Despite this, early settlement discounting policy can be something of a damp squib, lots of promise, not much actual benefit. Of course the potential is huge – but frequently the application of strategy is handled badly.
Historically, early settlement discounts have been arranged by Purchasing without prior agreement with AP, leading to unrealistic payment terms and a situation where no-one is satisfied. For example, the supplier isn’t paid when he thought he would be and in some instances the discounts are taken whether they’ve been earned or not. The consequence of this can be that it becomes much harder for Purchasing to negotiate a discount the next time – with the possibility of a detrimental effect on the supply chain.
Measure it to Capture it
So what’s the answer? Well, in the first place organisations need to know what they should be capturing, what’s been missed and what could be captured if only the right systems were in place. Often, this is where AP automation comes in. However, the best place to start is with a thorough investigation and analysis of the existing environment. Too many organisations operate in a vacuum of knowledge about their existing processes, so that when they implement an automation programme – they are at risk of automating an error-ridden process and sidelining manual activities which are of value.
Once an organisation has decided on the automation partner which best suits them, the next step is to consider the benefits of dynamic discounting – like early settlement discount capture, just turbo charged! Usually, it’s possible to find solutions which will integrate with your existing automation partner, drawing on the data you already have – but fine tuning it to create something better.
Where dynamic discounting differs is in its application. If you take a solution such as the one offered by SAP Solution Partner, Taulia for example, it offers organisations the opportunity to capture discounts from their suppliers on a sliding scale, meaning that even when payment terms slip past the traditional timeframe, discounts (albeit at a lesser rate) can still be taken. Organisations who have invested in this technology report that it has enabled them to regain integrity with suppliers and given them a better visibility and control of their working capital.
Where these types of solution have fallen down in the past has been in supplier adoption, particularly amongst smaller SMEs. However, with the advance in cloud solutions, this is becoming less of an issue. With Taulia’s solution, suppliers are invited to opt in via an automatic online enrolment campaign. On top of that, with their extensive reporting capabilities, organisations are able to stay in full control, putting the power back in the hands of the finance department.
The Revolution has Started
If you add to that the increase in the usage of vendor portals (giving suppliers instant access and visibility to their invoice processing) it’s easy to see that the world of AP automation and workflow practice is starting to change. We are now at the beginning of a quiet revolution in finance and supply chain automation. For those FDs with a keen eye to new technology and how it can help progress the finance arena, there are plenty of advantages to be had.