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9 Strategies for
Writing Accounts Payable Procedures |
by:
Chris
Anderson |
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The Cash to Cash Cycle
Part Four of Series
Part One: http://www.bizmanualz.com/articles/01-05-05_inventory_procedures.html/?ART78
Part Two: http://www.bizmanualz.com/articles/01-11-05_accounts_receivable.html/?ART79
Part Three: http://www.bizmanualz.com/articles/01-18-05_Sales_Marketing.html/?ART80
Next Week: Complete Cash to Cash Cycle
The white flag is just a nose away…toward the Million dollar prize
in cash savings for your business…
So far, in Inventory and Accounts Receivable, we've found $250,000
each in cash savings. Then we found another 250K in Sales and
Marketing. And so, now, Accounts Payable is the final process
within the Cash to Cash Cycle - and also the final $250,000.
The cash cycle is undoubtedly the single most important process
to optimize for any business – from when you spend money to when
you get money.
Circling the Cash to Cash Cycle
So let’s tie this back to accounts payable - the event that pays
for the liability incurred by purchasing, which is for inventory
required by manufacturing to meet demand. Sales generate this
demand that creates the accounts receivables, which is turned
into cash. And now we have come full circle and completed the
discussion on the cash to cash cycle.
Increasing the Velocity of Accounts Payable Processes
Your accounts payable is a bit different than the other processes
we have examined so far. The first three processes we looked at
represented processes where the focus was on reducing the size
of assets (inventory or accounts receivable) or expenses (marketing)
and increasing the velocity or cycle time. But in accounts payable
our focus is on increasing the size of the asset, while maintaining
a solid credit rating - and increasing the velocity of the process.
Now let’s look at how to find $250,000 in accounts payable savings.
If your organization has $500,000 in accounts payable each month,
then STOP! We can find $250,000 in savings right here. Where,
you ask? Increasing payables by 25% will produce $125,000 in cash
plus $125,000 from automating tasks, taking more discounts, and
managing the process better.
Service Business Procedures Case Study
An organization with $600,000 in monthly payables needed assistance.
We examined their payables process to understand and quantify
workflow, paper processing and credit issues. Then we designed
and implemented a process to increase their use of payables and
discounts, improve their payables cycle efficiency, and tie it
to their purchasing and receivable cycles. We then reinvested
$50,000 back into an Enterprise Resource Planning (ERP) program
to automate some of the processes that weren’t automated already.
The metrics we developed reduced their purchasing & payables expenses
by 25% and increased their efficiency from 50% to 75% within 2
months of implementing the new procedures. With these new processes
and reports, the company now tracks payables cycle efficiency
and average days payables, rather than just bills paid on time
or outstanding balance, as the measure of their payables effectiveness.
The result: an extra $300,000 in cash plus a 50% increase in process
capability (capacity).
But how?
Methods to Design Your News Accounts Payable and Accounting Procedures
• Eliminate Paper. The single biggest cost for any purchasing
and payables department is paper, including: purchase orders,
purchase order follow-up, small-dollar purchases, delivery tracking
& receipts, and vendor payments. Utilizing paperless invoices,
Web-based supplier self-servicing, centralized vendor files, automated
workflows for electronic or imaged invoices (see ERP below), and
payment methods, such as business credit cards, Electronic Data
Interchange (EDI) and Electronic Funds Transfer (EFT), can reduce
paper handling costs by as much as 90%.
• Integrate ERP Systems. Enterprise Resource Planning (ERP) automates
the purchasing and payables functions, which allows a company
to get more work done with fewer personnel. Also, electronic invoice
matching applications save time in retrieving paperwork. It is
estimated that an ERP system can annually save an organization
$300 per million in sales.
• Increase Payment Terms. Negotiate payment terms based on receipt
of goods or the invoice. This can add one week or more to your
terms, which can be 25% of 30 day terms. Use EFT for just-in-time
payments to maximize your payables terms and minimizing the impact
to your credit.
• Take Payment Discounts. If you are getting 2%/10 net 30 terms,
then consider taking it. This means you are offered a 2% discount
if you pay within 10 days, instead of the normal 30 day terms.
This translates into an 18% return on your capital, and for many
organizations this is a good return on your investment.
• Review Purchases. Purchasing is a continuous process that requires
continuous review. Consider: transportation charges, expedited
fees, odd lot penalties, new pricing, new products, consolidating
vendors, new vendors or buying groups, payment terms, and more.
Communicate with your suppliers to improve the process. And review
and monitor everything to account for changes in your environment.
• Communicate with Suppliers. Communicate with your suppliers
to improve the process. Ask suppliers to submit their invoices
electronically. This will save you time, resources and losses
due to waste.
• Eliminate Disputes. Disputes with your suppliers are typically
the result of a problem with your purchasing/receiving process.
When disputes occur, review your purchasing procedures to ensure
that they are producing the correct metrics and that you are not
forced to pay for your mistakes.
• Reduce Errors. Overpayments, payments made to the wrong vendors,
fake invoices, or even late payments represent a common problem
for payables. Increasing your focus on error control, along with
written procedures and audits, can reduce these errors considerably.
• Train personnel. Provide your accounts payable staff with regular
formal training. This will arm them with better knowledge of frauds,
negotiating skills, and an understanding of the economics of payables
– which will result in improved effectiveness.
Accounting Policies and Procedures for Cash in the Bank
In the past few weeks, we have showed you four parts of your financial
statements that will each contribute $250,000 in cash savings.
The last hurdle was Accounts Payable, and we sailed through it.
And now we have crossed our final goal: $1,000,000!
Time was - and is - the key. All you have to do is own it. And,
remember, next week we will put together each of the four elements
of the cash to cash cycle, and look at how it affects the working
capital of your business.
About the author:
Chris Anderson is currently the managing director of Bizmanualz,
Inc. and co-author of policies and procedures manuals, producing
the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: http://www.bizmanualz.com?src=ART81
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