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: