Creating a Payables Strategy
Accounts
Payable Guide
Accounts payable has traditionally been viewed as a cost center by most businesses, but adopting the right payables strategy can provide cost-saving operational benefits and free up resources for more strategic uses. It takes some time and effort to get started, but once implemented, a payables strategy provides a continuous stream of measurable returns.
“ Processing a paper invoice can cost up to 2.5 times more than processing an electronic invoice.”
— IFO’s 2013 AP Automation Study
TECHNOLOGY IS KEY
A well-articulated accounts payable strategy coupled with the right technology -enabled solution can return significant benefits to your business in many areas, effectively transforming an operational cost center into a value-added service. An Institute of Financial Operations (IFO) survey of businesses that have adopted automation in their accounts payable process found that more than 25 percent achieved lower costs, but an even greater number — almost a third — benefited from improved visibility and reporting. Other advantages cited by survey respondents included faster turnaround, fewer errors and better management of working capital.
While the technology to implement accounts payable automation has been available for years, adoption has been slow. Many businesses — especially small- and mid-sized ones — are still buried under high volumes of paper invoices and obsolete payment methodologies, according to the IFO’s
2013 AP Automation Study. All this paper has meant high costs, inefficient processes, many errors, slower processing turnaround and a lack of visibility into key financial data, the report states. Additionally, the slow processing of paper invoices makes it difficult for companies to capture lucrative supplier discounts. The study found that processing a paper invoice can cost up to 2.5 times more than processing an electronic invoice.
Accounts Payable Guide
Creating a Payables Strategy
“There are many different ways to go about formulating a strategy to optimize the value of a payables process for the business as a whole, but what’s most important is that you take a thoughtful and comprehensive approach”, says Joseph Ariola, Senior Vice President, National Sales Manager, Treasury Services, at KeyBank. “The process should be goal-driven, so start by identifying the primary objective you want to achieve and any secondary goals. You should create a mini-business plan. It doesn’t need to be as detailed as a traditional business plan, but you want to set a clear direction before you start spending any money,” he says. “It’s a good idea to sit down with an expert at the start of the process to go over all your options,” he adds. Identifying overall goals and objectives at the outset will drive the strategy for a number of functional areas, says Mike Dolski, CFO at BlueGrace Logistics, an Inc. 500 company. It is critical to understand your current payables approach and how it is interrelated with purchasing, IT, accounts receivable, customer service, etc. “Without a detailed understanding of the company and its functional areas, it is virtually impossible to develop an optimal payables strategy,” he says.
An almost universal driver of accounts payable strategies these days is a desire and/or need to do more with less, Ariola says. Many of KeyBank’s business customers first approach this topic when their payables operations are busting at the seams. “It gets to the point that whenever they add a few more clients, they need to add a body in accounts payable, which drives up overhead and skews the cost of client acquisition. Technology-enabled, scalable payables solutions are the obvious answer to that problem.”
IT STARTS WITH A THOUGHTFUL APPROACH
Payables strategies should be crafted to meet the specific needs of an individual business, agrees James M. Kerr, a partner in BlumShapiro Consulting, a
CPA, tax and business consulting firm, and author of The Executive Checklist
(Palgrave Macmillan, 2014). The guiding tenets should be the business’s current financial position and its vision of the future. For example, if cash flow is an issue for your company, you might consider adopting a 90-day payables strategy. If you need to reduce expenses, your strategy should be designed to take advantage of all early payment discounts available. “If a company’s ownership is looking to sell the business and needs to spruce it up for acquisition, then they may want to manage to a 30-day schedule to improve goodwill with their suppliers, while keeping their books fiscally sound,” he says. While strategies should be customized to align with a business’s priorities, most have several goals in common, such as minimizing costs, ensuring that purchases are made from preferred and approved vendors, using payment types and channels that are consistent with trading partner agreements, and freeing up staff to focus on more strategic objectives rather than day-to-day tactical processes. These goals are readily achievable through a well-articulated payables strategy by companies of just about any size, but getting there often involves overcoming pain points.
A few pain points that Ariola sees include:
• Technology. There are certain technology requirements that have to be in place to enable automation, scalability and reliability. “The solution you choose must be able to talk to the systems your bank and your vendors use, all without a ton of human oversight,” he says. Typically, that does not require substantial investment in new IT infrastructure, but it does require someone on staff with the relevant technology skills. “The needed capabilities for things like file conversion and uploading are usually present in a company’s existing infrastructure, but you need someone who is able to coordinate the effort.”
• Staffing. Many companies have been operating with bare-bones IT and
payables staff — or none at all — since the Great Recession, and the tepid recovery has not been enough to convince them to add employees, Ariola points out. Someone has to be put in charge of implementation, which can be a time-consuming duty, but once the system is up and running, the demands on that person’s time are greatly reduced. “That’s why you need to do that mini-business plan. It should include who is going to be responsible for implementation and how that person will be shifted to more strategic and/or revenue-producing activities once the payables solution reaches a critical mass. That means the solution is highly automated, functioning smoothly, and virtually self-sustaining,” he explains.
Accounts Payable Guide
Creating a Payables Strategy
MATCH THE STRATEGY TO SPECIFIC NEEDS
“ The solution you choose must be able to talk to the systems your bank and your vendors use, all without a ton of human oversight.”
— Joseph Ariola, Senior Vice President, National Sales Manager, Treasury Services, KeyBank
Accounts Payable Guide
Creating a Payables Strategy
• Vendors. In addition, maximizing the value of a payables strategy requires you to have conversations with all of your vendors to explain the benefits it will provide to them, such as no more check processing or trips to the bank, faster payment, no bounced or lost checks, etc. In exchange for those benefits, there is usually a small cost in the form of a card-based payment system. Your mini-business plan should address the question of who is going to have those vendor conversations and how much time it will take. “What most of our customers find is that almost all of their vendors are already using similar payables solutions themselves, so they’re very open to the idea,” Ariola says. “But in some cases, there may be pushback, and you need to be prepared to deal with it. For example, a vendor might want to reduce or eliminate an early payment discount in exchange for accepting the new form of payment. Then it comes down to doing the math to determine which is worth more to your business — the discount or the savings you’ll realize from using the payment solution.”
• Mindset. This is the biggest hurdle most small- and medium-sized businesses face when it comes to implementing a payables solution. Most business owners easily grasp all the advantages a payables solution can provide, but some run up against stumbling blocks. One is cultural and/or organizational resistance to change — the attitude that “we’ve been doing it this way forever, and we’re not going to change, because change is hard.” Another is fear that vendors will perceive the adoption of a card-based payment system as an indication of financial weakness. A third potential stumbling block, and the hardest to overcome, is that long-time employee in accounts payable who is not so likely to change processes anytime soon. With the right plan, companies can have success in dealing with employees who are not comfortable changing and move them along to new, more efficient ways of managing payables.
• Cost. The challenge here is that the payback on your initial investment of time and money may be ambiguous or impossible to calculate with certainty. It’s difficult to know for sure exactly how long implementation is going to take or how much time the person designated to quarterback the project will have to devote to it. Typically, cost savings are significant and easily measurable once the program is up and running smoothly, but many business owners remain uncertain about the strength of the economic rebound and hesitant to commit to any upfront investment not clearly quantifiable in terms of time and money. “Again, this is why that mini-business plan is so important,” Ariola stresses. “These are all issues that should be addressed proactively.”
With the right plan, companies can have success in dealing with employees who are not comfortable changing and move them along to new, more efficient ways of managing payables.
Accounts Payable Guide
Creating a Payables Strategy
The benefits of creating a payables strategy around automation, scalability and reliability are easily achievable, and adopting these best practices can help you get there more quickly and easily:
1. Have someone in your corner who has been through the process and will sit down with you and ask a lot of questions to get you started on your mini-business plan.
2. Designate a champion for the creation, implementation, and company-wide adoption of the new payables solution.
3. Include long- and short-term forecasts of company cash requirements as part of your strategy.
4. Think about payables as part of your overall business strategy. 5. Establish long-term relationships with key vendors.
6. Have a written procedure for payables. This should include guidelines for when to pay, how much to pay and the requirements for releasing an invoice for payment, says Bill Ringle, founder and president of consulting firm System Ringle.
“It’s important to keep in mind that there is no one-size-fits-all solution, and that your payables strategy must be customized to your specific business needs in order to be maximally effective”, Ariola says. “Yes, there is some upfront work involved, but once it is done, it will transform your company for life, providing you with benefits every single day.”
SIX BEST PRACTICES HELP GET YOU THERE
“ It’s important to keep in mind that there is no one-size-fits-all solution, and that your payables strategy must be customized to your specific business needs in order to be maximally effective.”
— Joseph Ariola, Senior Vice President, National Sales Manager, Treasury Services, KeyBank
