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Emerging Payment and Discount Paradigms in the Supply Chain
Working capital optimization, cash flow visibility and discounts, discounts, discounts! Get ready to reap the benefits of AP automation
Who would have imagined that creating a seamless purchase-to-pay process would be more challenging than putting men on the moon? While great strides have been made in supply chain management processes, accounts payable and supplier payments are still mired in labor and paper-intensive processes.
Not anymore. The good news is that several new payment management tools are starting to change the status quo. Today, many innovative financial managers now recognize AP automation as an area offering significant potential for not only generating bottom-line improvements, like cost containment and productivity enhancement, but also delivering numerous strategic benefits around spend and discount management.
Take the Discount, Dummy
Here's a classic issue. You receive an invoice from a supplier, but because of a quantity or price exception against the purchase order, your accounts payables department is unable to process the invoice fast enough to capture the early payment discount your procurement department negotiated with that supplier.
"For most organizations, lost discounts can add up to hundreds of thousands of dollars in profit leakage each year," claims Sush Koka, research director at PayStream Advisors, a Charlotte, N.C.-based research firm. "We are very excited to see many companies starting to move towards paperless environments, which allow them to review and approve invoices faster."
These companies have learned that accelerating the invoice receipt-to-pay cycle from weeks to just days delivers a rapid return on investment (see Figure 1).
Figure 1: Slow Processing of Invoices Causes Missed Discounts
Source: PayStream Advisors, Inc.
Drive to Capture Early Payment Discounts
One of the major drivers for AP automation has been senior management's emphasis on improving visibility to payment liabilities. This has come to bear along with a strong push toward increasing discount capture from suppliers for prompt payments, such as 2 percent 10 net 30 terms.
Table 1: Early Payment/Supply Chain Finance Benefits
However, the reality is far from this. According to PayStream Advisors' Financial Automation Survey, at least half of the organizations participating in the survey are unable to capture anywhere between 50 to 70 percent of discounts offered because their AP departments are unable to approve and pay the invoices within the 10 day discount window.
The enemy of efficient AP processing and working capital visibility is paper. Payables departments relying on paper invoices and decentralized receipt of transaction-related documents suffer from lengthy approval and payment cycles, which can range from 15 to 40 days, or even more in some cases. According to statistics from PayStream Advisors, the average invoice cycle time is 23 days from receipt to approval, with best-in-class companies completing this cycle in five days.
Drive for Straight-through Processing
In order to overcome these challenges associated with paper, organizations are moving automation to the front-end of the invoice receipt-to-pay cycle. They are also looking to leverage straight-through-processing or "touchless" processes to the extent possible (see Figure 2).
The rationale for this is simple. Touchless processing facilitates the automatic payment of "clean" invoices — those with no errors or ones that meet predefined criteria. This allows organizations to enhance discount capture as well as to free up buyers and AP staff to spend more time managing exceptions and accelerating dispute resolution with suppliers.
Figure 2: Stages of AP Automation Impact Discount Capture and Working Capital Benefits
Whether the functionality is provided by your ERP system, a workflow system or an e-invoicing application, here are some options that enable touchless processing:
Finally, it is important to configure reminders, escalation procedures and out-of-office rules to ensure that invoices that do need approval do not fall through the cracks.
Not anymore. The good news is that several new payment management tools are starting to change the status quo. Today, many innovative financial managers now recognize AP automation as an area offering significant potential for not only generating bottom-line improvements, like cost containment and productivity enhancement, but also delivering numerous strategic benefits around spend and discount management.
Take the Discount, Dummy
Here's a classic issue. You receive an invoice from a supplier, but because of a quantity or price exception against the purchase order, your accounts payables department is unable to process the invoice fast enough to capture the early payment discount your procurement department negotiated with that supplier.
"For most organizations, lost discounts can add up to hundreds of thousands of dollars in profit leakage each year," claims Sush Koka, research director at PayStream Advisors, a Charlotte, N.C.-based research firm. "We are very excited to see many companies starting to move towards paperless environments, which allow them to review and approve invoices faster."
These companies have learned that accelerating the invoice receipt-to-pay cycle from weeks to just days delivers a rapid return on investment (see Figure 1).
Figure 1: Slow Processing of Invoices Causes Missed Discounts
Source: PayStream Advisors, Inc.
Drive to Capture Early Payment Discounts
One of the major drivers for AP automation has been senior management's emphasis on improving visibility to payment liabilities. This has come to bear along with a strong push toward increasing discount capture from suppliers for prompt payments, such as 2 percent 10 net 30 terms.
Table 1: Early Payment/Supply Chain Finance Benefits
However, the reality is far from this. According to PayStream Advisors' Financial Automation Survey, at least half of the organizations participating in the survey are unable to capture anywhere between 50 to 70 percent of discounts offered because their AP departments are unable to approve and pay the invoices within the 10 day discount window.
The enemy of efficient AP processing and working capital visibility is paper. Payables departments relying on paper invoices and decentralized receipt of transaction-related documents suffer from lengthy approval and payment cycles, which can range from 15 to 40 days, or even more in some cases. According to statistics from PayStream Advisors, the average invoice cycle time is 23 days from receipt to approval, with best-in-class companies completing this cycle in five days.
Drive for Straight-through Processing
In order to overcome these challenges associated with paper, organizations are moving automation to the front-end of the invoice receipt-to-pay cycle. They are also looking to leverage straight-through-processing or "touchless" processes to the extent possible (see Figure 2).
The rationale for this is simple. Touchless processing facilitates the automatic payment of "clean" invoices — those with no errors or ones that meet predefined criteria. This allows organizations to enhance discount capture as well as to free up buyers and AP staff to spend more time managing exceptions and accelerating dispute resolution with suppliers.
Figure 2: Stages of AP Automation Impact Discount Capture and Working Capital Benefits
Whether the functionality is provided by your ERP system, a workflow system or an e-invoicing application, here are some options that enable touchless processing:
- Validation of invoices, at the time of submission, based on preconfigured business rules and tolerance levels to correct any errors or exceptions before the invoice even reaches AP and the clock starts ticking.
- Automated three-way matching of POs, invoices and good receipts documents, so that invoices can immediately be scheduled for payment. Some organizations even allow a two-way matching success (PO and invoice) to trigger the payment instruction for a small set of trusted suppliers.
- Automatic approval of, or fewer levels of approval for, certain non-PO invoices, especially when it comes to small dollar invoices or suppliers with whom you have a long and strategic relationship.
Finally, it is important to configure reminders, escalation procedures and out-of-office rules to ensure that invoices that do need approval do not fall through the cracks.
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