As discussed in the previous post, Treasury understands that AP has a significant impact on working capital and accordingly, their stake in the success of AP is high. Optimizing working capital and liquidity requires that AP and Treasury work together. This is important when we consider how vital it is to both departments for AP to succeed in linking their activities and projects to the organization’s strategic and tactical objectives. It is Treasury’s partnership and influence that can create an environment where these AP initiatives can be taken seriously.
Regarding AP, there are important considerations for Treasury that cannot be ignored:
- DPO versus Liquidity. Month-end numbers and liquidity needs.
- DPO. Month-end Numbers. The CCC numbers are provided as a measurement in the form of days. These numbers come from month-end financial reporting. DPO, for example is the payables outstanding at the end of the month (of, more commonly the average of the most recent month-end and the month prior). This does not show or reflect the actual payables outstanding every day of the month. Each CCC element (payables, inventory and receivables) can have high or low points during the month. AP and Treasury may love the financial statement driven measurements for the purpose they were created. However, they are not created to measure liquidity needs directly.
- LIQUIDITY NEEDS. Continual View. The old joke “I can’t be out of money; I still have checks!” is a consumer-oriented example of the business situation that could be phrased as “We can’t have a liquidity issue on the 15th since our month-end working capital metrics are great!” A firm that has significant payments due on the 5th can run into liquidity problems even if their month-end accounts payables balances seem to provide significant working capital. The balance of the cash (increased by collecting receivables and decreased when AP makes the payment) can vary greatly throughout the month. Liquidity is the domain of Treasury, and AP has some important levers that impact liquidity on a daily basis.
Optimizing working capital and liquidity needs to be front and center of any major AP project or initiative to ensure it garners the right type of attention and support. This is an effective way to manage relationships and expectations while also providing significant value to the organization as a whole, including Treasury. Treasury must not undervalue their role in this process and help make the case for AP by highlighting the value their projects bring to the organization’s financial goals.