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Generate Income From Your AP Function

March 04, 2015

In the past, many organisations treated Accounts Payable (AP) as a pure cost centre, and focused primarily on the Accounts Receivables side of finance, in an effort to optimise profitability, by ensuring that cash and DSO (Days Sales Outstanding) are tightly managed. Now the more progressive finance leaders are seeing AP as an area that creates value and even generates income. In the current climate this is a vital part of any finance strategy.

There are five key ways an Accounts Payable function can make money rather than spend it:

  1. Capturing early settlement discounts
  2. Using purchasing cards
  3. Reverse factoring
  4. Detecting and recovering duplicate or erroneous payments
  5. Winning additional services

1. Capturing Early Settlement Discounts

The Aberdeen Group, a market research firm, discovered that up to 75 percent of potential savings negotiated at the time of sourcing did not get realised at execution. Tom Glassanos of Bavelos Group offers these specific tips for turning the accounts payable department into a savings centre:

Use an electronic settlement system – Your AP team will need to add speed and visibility to your settlement process to make it possible to identify opportunities for early payment discounts, and then follow up accordingly. A variety of AP technology companies provides specific software solutions for capturing early settlement discounts electronically, dramatically improving capture rates and overall savings.

Proactively recruit suppliers –Organisations are increasingly taking charge and driving early settlement discounts across their supplier bases, quickly growing the number of suppliers from tens to hundreds or even thousands who accept them. And the rewards build quickly. Don’t wait for suppliers to offer you early settlement discounts; take charge and drive negotiations.

Segment your suppliers for maximum impact – When it comes to rolling out early payment programmes, it’s important to remember that one size doesn’t fit all. You need to consider the amount of discount ‘power’ you have with a particular supplier and define the payment terms appropriately.

Give your suppliers every opportunity to participate – Not every supplier is willing to sign up for an early payment term. According to an Accounts Payable News® 2010 survey, on average 19 to 24 percent of suppliers will accept early payment terms – leaving the remainder on net terms. Are these net terms suppliers a lost cause? Absolutely not. In fact, it turns out that 62 percent of survey respondents indicated that they occasionally work with their customers to accelerate payments for discounts.

2. Using Purchasing Cards (P-cards)

The use of p-cards is steadily growing in the UK. Accounts payable can often take the lead-- sometimes together with procurement-- to set up and operate the p-card programme. Then, through careful AP analytics they can drive further value and savings. P-card programmes drive savings and add value in three principal ways:

Attractive Rebates - Organisations collect rebates based on their purchasing volume. P-cards are quite a lucrative product for the financial firms that issue them, so the marketplace has become very competitive. Large p-card programmes—i.e. those handling high invoice transaction volumes-- are worth a healthy rebate in today’s competitive market. With the right deal and the right provider, a company can save money on overhead, obtain lower prices for goods and services purchased and get cash back from the card issuer. Rates vary, typically ranging from 1 to 3% with a minimum annual amount spend. For example: a spend of £10 million per annum could equate to £100K in rebates, a substantial amount for any AP department.
Lower Processing Costs - By using p-cards, the cost per transaction is rapidly reduced especially for small value invoices or OTOV (one time only vendors).

Transaction Control - Most organisations today are keen to consolidate the number of suppliers they use, channelling more business to fewer providers, and then using that purchasing volume to negotiate price discounts. The more often employees are permitted to engage in “rogue buying”—going anywhere they want to make company purchases— the more the company’s negotiating leverage is diluted. On the other hand, the more often employees use preferred providers, the greater the price discounts the company can negotiate. Thus a p-card programme is key not just to reducing overhead but to lowering prices for what is bought.

3. Reverse Factoring

Unlike traditional factoring, where a supplier wants to finance his receivables, reverse factoring (or supply chain financing) is a financing solution initiated by the ordering party in order to help his suppliers to finance their receivables more easily and at a lower interest rate than what they would normally be offered. (Wikipedia)

For example you receive an invoice today with a due date in 60 days, and you give your bank instructions to pay to your vendor on the due date (by BACS or cheque). Then your bank contacts the vendor and offers him the possibility to discount the payment order, charging him interest and a fee (that have been previously arranged between you and your bank in the contract). So the vendor can wait until the due date to receive the payment, or advance it by paying interest and commission.

If the vendor chooses the discount option, the payment is definitive (you won’t be able to cancel the payment order to your vendor and you will owe the money to your bank instead of to your vendor) so your vendor will remove the amount from his balance sheet helping to reduce his debtors balance. As you are offering your vendor the opportunity to get his money sooner just by paying a low fee and interest, you can get better payment terms from your vendors.

Some reverse factoring also includes a little reward to you every time a vendor uses the discount option; it depends on the arrangement you made with your bank. Not all banks do reverse factoring as the bank is incurring risk every time a vendor uses the discount option, so you will need a strong relationship with the bank you will use. Most banks will cap the amount of reverse factoring you are allowed to use.

Benefits for you:
  • As you are offering your vendor the possibility to advance the payment, you can arrange a fixed day for payments (10 and 25 days for example)
  • Your vendor can advance the payment at no cost to you.
  • If you get fixed days from your vendors, your payments will be more organised.
  • You can get an income reward every time a vendor uses the discount option.
Benefits for your vendor:
  • They may be able to use the discount option at a lower interest rate and fees than for normal factoring.
  • Using the discount option, they can remove your invoices from their debtors balance.
Drawbacks for you:

If you send a payment to your vendor, your vendor uses the discount option, and then you want to cancel the payment order (perhaps because there was an error in the accountings for example), you won’t be allowed to cancel the payment order, and will be forced to pay to your bank on the due date, so you need a safe accounting process to be sure that when you send a payment order, it’s a correct payment order.

Drawbacks for your vendor:

The vendor might be able to get a better interest rate and fee from his current factoring arrangement than the interest and fee you are offering to him for reverse factoring; this would be most likely to happen if your vendor is a very large company.

4. Detecting and recovering duplicate or erroneous payments

Having an internal system for detecting and recovering duplicate payments from prior financial years means the Accounts Payable team can recover lost profits. In many cases they keep what is recovered or at least claim a percentage finder’s fee from the budget holder. In some cases the actual suppliers can be charged interest and administration fees of 5-10% for keeping hold of large duplicate payments for a year or more. This could generate significant income.

Recovery – Recovery rates can be radically enhanced through using specialist easy- to-use accounts payable audit software. Typically, 1 in 1000 payments will be a duplicate payment (Institute of Internal Auditors). So if your organisation spends £50 million annually, then it is likely you are losing £50,000 or more in duplicate payments each year. If you spend more, the problem is probably worse.

Protection – Through careful and constant monitoring of AP transactions, supplier fraud can be detected and reduced. Ideally done on a daily or weekly basis, monitoring will help avoid significant cost leakage.

Prevention –If you can prevent invoicing and purchasing errors--of which there are over 30 known types--from happening in the first place, then you can reduce the number of problem payments and time involved in fixing them. This can create significant time efficiencies and process improvements.

5. Winning Additional Income

With the rise of centralised and shared services over the last 5 years, the more progressive, best-in-class AP teams are now seeking to win business in the form of additional transactions to process and manage. Winning new clients will generate real additional income.
Sometimes this could be internal clients within a larger business that has multiple AP centres around the country or world. Or AP can provide additional services such as spend analysis or internal supplier research. These can be charged out using an internal cost model.
More often it is new external clients that are won. Once such example is East Lancashire Shared Services, part of a National Health Service (NHS) sector which has seen considerable consolidation over the last two years due to government policy. They bid for and won the outsource contract for the London Ambulance Service.
Winning a new client in this way means there is a defined contribution margin for the additional services. In addition, the AP department will accrue efficiency benefits through economies of scale and by using the latest technologies.

Progressive Accounts Payable teams now have a variety of options at their disposal to move from being a transaction-based support function to proactively adding value to the business and actually becoming a profit or savings centre. This is precisely the sort of new role that raises the profile of the Accounts Payable function, gaining the department a fully-fledged seat at the Finance management table.

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