Finance and treasury departments are arming themselves with tools and processes to help monitor, conserve, and maximize cash returns in uncertain times. Accounts payable can also play a prominent role in the cash optimization process. After all, accounts payable is one of the largest, if not the largest, dispensers of a company’s cash.
Do You Know Your DPO (Days Payables Outstanding)?
If you want your AP operation to play a prominent role in the cash management equation, it is important to know and understand your company’s DPO. Understanding this number is crucial because it is a key metric in cash management and finance. The investment community will often track this number as a measure of a company’s financial health.
A low DPO may indicate payment policies are not sufficiently focused on preserving cash or getting a reasonable return on cash. A number that is too high may indicate that a company is having difficulties paying its bills, may be on unsound footing, or is hoarding cash at the expense of its suppliers, which could have negative downstream supply chain ramifications. Whatever your target DPO is, it is important to understand that AP plays a big role in influencing that number. The first step in making yourself valuable to your organization in the cash management discussion is understanding how your AP operation affects DPO.
Tools that Affect DPO
The most obvious area impacting your DPO number is payment terms. Payment terms are often negotiated by the procurement department, who use them as a lever to negotiate favorable pricing.
One relatively easy-to-implement strategy would be to use a best-of-terms calculation. After comparing the invoice terms, PO terms, vendor master terms, and contract terms, take the most advantageous and pay based on those terms. There are also ways of automating this process so you are not inundated with manual calculations to achieve this goal.
Dynamic Discounting
One tool gaining a lot of traction is dynamic discounting. Dynamic discounting is a method whereby the buying company offers select suppliers early payment of their outstanding invoice(s) for accepting a discount off the amount due.
The discount gets smaller as the invoice approaches its stated due date. You control the discount and which invoices, suppliers, and commodity types get it. The impact on the cash flow due to the implementation of this kind of program can be phenomenal. While it will lower your DPO to some degree, return on investment in terms of cash is a great tradeoff.
In order for your AP department to take advantage of dynamic discounting, invoices must be ready for payment quickly. Dynamic discounting will not work if invoices become ready to pay only a few days before the due date. You must also have an efficient disbursement process, as someone accepting a discount for quick payment will not want to wait for the next “check run” or “ACH run.”
Other Tools
A few other tools and techniques worth mentioning are PCard, rebate programs, and streamlining your AP operations.
When considering the various tools and techniques that can help you contribute to your company’s cash management strategy, keep in mind that your suppliers are also looking to manage their cash effectively. Sometimes, accounts payable departments in their desire to manage cash, will implement procedures that have unintended consequences. Be aware that any program you put in place can have unintended adverse consequences.
Get Started
Cash is the most critical component in the health of a company. Accounts payable practitioners have many tools, techniques, and processes at their disposal to address cash within the company.
ICG has several services and cloud–hosted solutions that can help your organization manage cash. For more information, contact ICG today or schedule a demonstration of one of our solutions.