As discussed in the previous post and throughout the series, as the function of accounts payable evolves, Treasury is positioned as an ideal partner to help transform it into a profit center. Here are the key takeaways you need to make it all happen:
Capital is the core driver for most companies. The board and executive team understand the importance of it since it also heavily influences the valuation of the firm. The AP process is quite operational and won’t gain much attention if the focus is on the operations side. AP needs to know how to frame their plans and actions in a way that generates more excitement up the management chain. AP can impact capital in positive and negative ways. Throwing around the word capital isn’t enough. Understand capital and how AP initiatives and actions, or inactions, can have an impact, and you can get far better attention.
Recognize the Time Value of Money.
Discounts missed and taken are terms largely unknown outside of AP and some Treasury circles. Few care about these things. But, this is just one example of how the time value of money intersects with working capital. The time value of money is a different way of recognizing the cost and value of capital. If AP can move out payment terms on some clients, they can often free up enough cash to take all financially viable discounts. This allows AP, in conjunction with Treasury, to see where their levers add financial value – and, add to the profit center calculation. Offering the option to your vendors, or making it part of the business model, to get paid earlier at a discount, ensured you can leverage all or most of AP instead of a small percentage of the payables universe.
Free Up Cash without Killing Your Trading Partners.
Simply pushing out payment terms may seem like a sure way to push the capital-raising requirements out to your vendors. This can harm or imperil some vendors who may not have ready access to inexpensive capital. Making life difficult for key vendors can backfire, creating a lose-lose situation. Instead, AP can pay earlier at a discount or AP can extend terms, while providing the flexibility of taking money earlier for those who need it. This flexibility can free up cash, without killing your trading partners, the cash that is freed up, or the reduction in all costs, all contribute to the profit center calculations. Take these critical steps to help transform your AP group into a profit center. The movement from cost center to profit center changes how the rest of the organization will look at and invest in AP.