Saw this good article on McKinsey & Co. website Uncovering Cash. Today’s AP automation and eProcurement tools can provide the process speed that creates more working capital. I have seen companies reduce the time to approve an invoice by as much as 18 days; most companies average 10 days. With the leading eProcurement technology, the average time to approve an invoice is measured in hours not days. This means that early payment discounting for vendors that have discount opportunities at 10 days can consistently count on earlier payments. However, early payment discount savings are just the tip of the iceberg.
With faster invoice approval times, a smart Controller will also look at their supply chain payment term landscape. There will likely be a large amount of vendors that are candidates for longer payment terms, i.e., moving from 30 day terms to 45 days or 60 day terms to 90 days. Yes, I know that old school thinking was that extending payment terms would not work with suppliers as it would hurt vendor relations to get paid so late. But I have found that most suppliers will readily accept a early payment discount if they could get paid early in a consistent and predictable manner. This is the key. The Controllers and Treasurers at your key suppliers know better than you do when they need cash. If they no longer have to guess when you are going to pay them and accept a discount on each invoice to get paid on a predicted date, you now have freed up a load of working capital.
With the right AP automation and/or eProcurement tools, you unlock the potential for predictable earnings.