Turning AP into a Profit Center with Electronic Payments
Transforming the accounts payable department into a function that generates profits for the business would have been inconceivable in the past. But that’s exactly what’s happening at more and more businesses.
And electronic payments are driving this unlikely metamorphosis.
- Higher profit margins: Electronic payments ensure timely payment of invoices to avoid late fees. Manual processes create a bottleneck that stop payments from going through on time. Studies show 84 percent of companies pay their suppliers late. In most cases, long cycle times are to blame for costly late payments, not a lack of funds. Timely payment also helps reduce credit lines, enables more investment in the overall business, reduces resources spent on payment settlement, and improves relationships with creditors and banks.
- Better DPO: Leveraging certain card programs for electronic payments enables buyers to extend their Days Payable Outstanding (DPO). In this scenario, the funding for the payment program is provided by the buyer’s bank via card. Buyers are cashing in on the fact that the payback period to the card issuing bank kicks in once the payment is initiated. That period can be 30 or 60 days. Hence, the buyer extends its DPO by that same period.
- Early-payment discounts: Many suppliers will exchange a discount on the amount due on an invoice for earlier payment; the earlier the payment, the bigger the discount. The result is that a buyer’s net cost for purchases will be lower. Suppliers will have to accept a small cost for accepting card payment, but they will be paid early. Electronic payments make it easy for buyers to pay within lucrative discount windows.
- Enhanced supplier relationships: Electronic payments enable suppliers to improve working capital management with faster and more predictable payments, reduced Days Sales Outstanding (DSO), and less need for expensive and restrictive third-party factoring. Suppliers also enjoy greater visibility into receivables, streamlined remittance reconciliation, and better collaboration with their customers. And electronic payments make it easier and less expensive for suppliers to receive and reconcile international payments. When your suppliers are happy, they are more likely to agree to concessions during negotiations.
These strategies offset department overhead and transform accounts payable into a profit center.