Friday, March 27, 2009

Cash is King!

More than any time in recent history has the statement “cash is king” more certain! Every day we read of corporations that can’t meet payrolls or pay bills. Even the state of California recently informed their vendors they will be paying late. The inability to pay the bills rolls through out the business chain.

Corporations determine the price for their goods and services based on a model that ensures they have sufficient cash to meet payrolls, replenish inventories and grow their business. In order to shorten the conversion to cash cycle they often offer a discount to customers if they pay early, often 10 days or less.

When payments are rendered at the latest date possible, this generates the least flexibility in the vendor business model. Worse yet, if the payment is at the last moment or even later and the early payment discount is still taken, then the vendor cash flow model is jeopardized.

Given the critical importance to generate adequate cash flow, corporations are now looking beyond the traditional avenues of increasing sales or decreasing cost. Many companies are seeing declines in sales and have already initiated labor reductions.

Companies have found improvements in the non labor spend process to be one of if not the most rewarding scenario.

While it is common to focus on labor reductions in the Accounts Payable process through automation, management of payment terms often generates the greatest reward.

Assume the following scenario:
Sales of $5,000,000,000 with 30% of revenue going to pay for non labor goods and services. If the automation is tempered with process optimization, payment within payment terms is now consistent. The corporation is now enabled to negotiate discounts they previously did not request since they knew meeting short payment cycles were impossible. The payment term to request is typically based on cash management principals that ensure the terms are sufficient so they more than offset interest rates incurred for short term financing. Following this scenario, if this corporation can negotiate 2% payment terms for an additional 5% of the $1,500,000,000 spend they can reduce cash paid to vendors by $1,500,000 per year. This goes straight to the bottom line profit as an increase. Assuming a 10% profit margin on sales, this would in turn offset a decline in sales of $15,000,000. When the economy does turn around these significant savings don’t vanish such as savings from labor reductions. With labor reductions, once business improves, rehires eliminate the prior labor reductions.

The above scenario is based on $5B sales revenue. It is an easy reach to estimate that Open Text current clients would elevate this number 100 times generating profit in excess of $150,000,000 just related to capture of payment terms. Add to this additional savings derived from implementation of optimal automated Accounts Payable processing related to capture not of new discounts but capture of 100% of current payment term discounts, the elimination of duplicate payments and the traditional labor savings…cash really does become KING!

See SAP EcoHub for more on SAP AP Optimization:

Does Procurement Care if Invoices are Paid Late?

Every day it seems some supplier is going out of business. One obvious reason is due to sales decrease. The decrease coupled with customers paying late result in insufficient cash to pay their payrolls and bills. Another way of looking at this is the cash conversion cycle is too long to sustain day to day operations.

If their cash conversion cycle increases due to late payments, they must find other ways to generate cash in the short term. Internal cost reduction efforts may impact the quality of the goods resulting in problem resolutions for the customer Procurement Department. Another method to generate cash is to raise prices. They may also either lower discounts or shorten payment timing. Once again, this presents Procurement with time consuming negotiations.

Late payments can also result in suppliers withholding shipment of critical goods or services. Since most purchase orders are based on delivery dates required by customer business processes, disruptions in these are normally routed to Procurement for resolution. Following this complete story can also be a laborious task with no favorable resolution to the customer.

In a worse case scenario, the supplier is forced to go out of business. Now Procurement must go through the entire sourcing exercise to find a new supplier. The new supplier may be more expensive, may be in a location that increases delivery cost or may not offer any terms. If the customer becomes know for late payment, the new supplier may demand cash up front before delivery or immediately upon delivery. If this was a single source supplier, entire business process can be impacted until Procurement finds an alternative.

Does Procurement care if invoices are paid late…I think so…what are your thoughts?

See SAP EcoHub for more on SAP AP Optimization:

If You Don't Keep Score Then You Are Only Practicing (SAP Invoice Management)

Keeping score is a fundamental business requirement. What you chose to monitor will often determine your success. One common pitfall is only measuring secondary key process indicators (KPIs) and not measuring primary KPIs. In baseball, is it more beneficial to know how the secondary KPI of times at bat or to know the primary results of the times at bat such as singles, doubles, triples, home runs, foul balls, strike outs and walks.

If you have implemented or you are considering implementation of the SAP Invoice Management by Open Text solution, you should be aware that this solution will dramatically improve the typical secondary KPIs but also the primary KPI of profit.

For example, measurements utilized in invoice to receipt payment process traditionally include (but not limited to) invoices processed per Accounts Payable processor, cost per invoice and invoices paid on time. While these are very important and should be measured, a case can be maid that they only tell part of the story.

One primary measure of corporate success is profit therefore what is the primary driver behind each of the measure mentioned above. The invoices per processor impacts profit by enabling of cost reduction due to labor savings therefore for every labor dollar saved, the profit increases.
Cost per invoice most often is based on the cost of the Accounting Department labor therefore much of the primary improvement would already be reflected by increasing invoices per processor. In addition to the direct labor savings there are other opportunities to improve the primary profit KPI. Implementation of a fully automated solution that includes OCR, e invoicing and workflow will also increase profit by enabling lower cost of invoice.

Measuring the percent of invoices paid on time impacts the primary profit KPI in several forms. The first is to ensure payment term discounts are captured as determined by cash management. Another impact is the ability to negotiate payment terms that were considered unattainable in the past since invoices could not be process in time to meet payment terms. Another consideration is how paying on time reduces the time spent talking with vendors about why they have not been paid. It is not uncommon for a corporation to have one or two persons with the primary responsibility to answer phones and emails from vendors.

Aside from the direct and significant impact on profit, paying late also impacts another very important area of primary interest, the corporate credit rating.

In summary...while it is very important to know how many times the Accounts Payable comes up to bat…it is even more important to know the results of the “at bat”!

See SAP EcoHub for more on SAP AP Optimization:

Welcome to the AP Optimization Blog

We all have visions of accounts payable as a bunch guys sitting in a back room somewhere with arms bands and green eyeshades pushing paper around. The point being that AP does it thing and what it does has little impact on the rest of the company. It time to let go of that perspective and take a much broader view of the truly strategic that AP plays in a company's success and profitability.

In this blog, I will be examing the evolving role of AP, particularly in the current economy where companies need to pay close attention to cash outflow and to look for ways to boost profits and lower costs. Here you will read my thoughts and perspective on ways companys can streamline AP operations and make AP a strategic asset and even a competitve advantage.

I have been involved with AP operations in various capacities for longer than I care to admit (read my bio for the full picture), but I am still learning new things every day. That a big reason for this blog. I want your comments and input. We're all in this together.