Improve Working Capital by Optimizing These 5 AP Functions.
Posted by Fazal Sayyed
Accounts payable has always been considered as a back-office operation that does not take centre stage when organisations want to develop or gain a competitive edge. However, accounts payable is frequently seen as the spend management information centre, the unit in charge of much of the business-critical data that influences the CFO agenda. Establish your AP team as a significant contributor to working capital efficiency, especially when collaborating with the procurement department, by following the steps below:
1.The procedure for selecting a vendor
Setting up preferred supplier lists is one of the first stages in putting an effective accounts payable system in place. This will stop maverick buying and put your company in a good position to bargain for the best possible terms. There are a number of actions you may take to negotiate conditions that will maximise your working capital as part of the vendor selection process:
- Establish priorities for the vendor negotiation process and ensure key personnel and decision makers are involved (e.g., Chief Financial Officer and Chief Procurement Officer).
- If you are starting from a position of power, then negotiate lengthier payment terms.
- Create supplier performance scorecards for strategic vendors and use these scorecards in negotiations to pressure suppliers to raise the quality of their goods or services, their levels of customer service, or both.
2.Process for setting up supplier master data
Once you have agreed upon conditions with vendors, it is crucial to accurately record and keep track of this information. More than only payment mistakes might come from inaccurate data entry. Additionally, it may result in account delinquencies, which restrict you from benefiting from offered discounts and could even cause supply delays. To prevent these results,
- Make sure that your buying and payables systems appropriately represent all service level agreements (SLAs). The specifications of the goods and services, the required levels of quality, the dates for deliveries, the obligations of the suppliers, and any applicable legal requirements for compliance should all be included in the supplier master data.
- Update the conditions of payment as well as whether volume discounts, trade credits, or other continuous or irregular refunds are available. The supplier master data must be updated to reflect any renegotiated or altered contractual conditions with suppliers.
- Keep your supplier contracts safe. Systems for managing documents can speed up this procedure and make it easier to find information.
3.contract evaluation procedure
It is crucial to routinely monitor vendor contracts to avoid erroneous or even fraudulent vendor billing practices that might lead to overpayment or duplicate payment.
- Give a central master data team ownership of the data so they can ensure it is accurate, complete, and complies with standards. This team should also routinely assess vendor performance to make sure they remain compliant with the terms of their contracts.
- Specify in supplier contracts that suppliers are responsible for fines and penalties if they are discovered to be performing subparly in some way.
- Review vendor contracts on a regular basis and in a timely manner and compare them to industry norms.
4.The procurement process
Many companies have hundreds, or even thousands, of suppliers. It might be difficult to keep track of all the bills you get and reconcile each invoice with its corresponding PO, even if your environment is more organized. However, failing to effectively manage payables makes it more difficult to plan and manage cash flows and foresee urgent demands for liquidity, placing many firms on an unneeded tightrope with their cash flow.
Additionally, a company that has lax procurement rules runs the danger of overspending or doing business with unauthorised vendors. You must monitor internal buyer procedures to make sure buyers deal with pre-approved vendors and keep below permitted spending limits in order to prevent maverick purchases or purchase control overrides. Here are some tactics to take into account:
- Create purchase orders (POs) for every new order so that you can verify any orders you get, lock in payment terms in advance, and compare invoices to past POs to make sure suppliers are billing you according to the conditions you agreed upon.
- To maximise your savings potential, investigate the validity of any early payment discounts, volume rebates, or trade spend programmes that may be offered. However, keep in mind that not all early payment discounts must be accepted. Paying later can be appropriate if you don't have the money on hand or if the capital investment is greater than the savings from the discount.
- Monitor overdue payments by vendor and by conditions of payment.
Another strategy to increase liquidity is to manage invoicing properly. Consider the following tactics to enhance processing:
- Establish a central processing office to provide a regulated and uniform procedure. • Refusing to pay erroneous invoices (e.g., errors in quantities, amounts, addresses, etc.). These ought to be returned to the provider.
- Process invoices promptly, and be sure to date-stamp them. Remember to carry out this procedure in accordance with the established internal service level agreements (e.g., process invoices within two days of receipt).
- Refrain from paying invoices before they are due.