Waiting to pay a bill as late as possible can be a very short-term strategy, but can be significantly penalizing.
One topic of CashFlow theory is to pay supplier invoices as late as possible while collecting from customers at maximum speed. Even withholding payments has been justified because it is more worthwhile to keep your money in the bank.
As an outsourced supplier invoice processing service provider, at easyap we usually present some of the arguments that justify the acceleration of the invoice management process in Accounts Payable Departments. These arguments are, among others:
- consume as little time as possible in the processing of invoices, with the consequent saving of time and money,
- benefit from the level of control provided by WorkFlow based technologies, or
- process invoices as quickly as possible, which means maximum visibility into forecasting and budgeting activities
But, considering the real value of reducing the process time needed to have an approved supplier invoice available for payment, is this a critical objective for the company in light of this Cash Flow theory?
Let's delve into some of the advantages of cutting the number of days it takes to process a vendor invoice. After that, you can still go with the theory of paying the later the better, or you can take advantage of some of the benefits listed below.
1.- Cash discounts
When the global credit crunch occurred, many organizations took extraordinary measures to ensure a positive balance in their cash accounts, including, for example, late payments, forced returns, inventory reduction, and even selling invoices (factoring). In the latter case, factoring, did you know that the global factoring market is now a market of around 2 trillion Euros - this is money out of your pocket!
So, let's look at the discount opportunities that are often hidden in a slow manual process of managing supplier invoices.
A common discount starts in the range of 2 to 3 percent of the negotiated payment terms. This discount is often binary, meaning that, for example, a payment in the first 10 days is 2 percent, but from day 11 the discount is zero.
Another way to take advantage of this discount is through dynamic negotiated discounts. This type of discount offers a sliding scale, with a full discount if payment is made on the first day and no discount if payment is made on the due date, with a sliding scale between those two points. The following graph shows that savings of up to 25% can be achieved on an annual basis.
2.- Get the best conditions from the supplier
It is no secret that all providers want to be paid as soon as possible to reduce their PMC (Average Collection Period). This fact, it is interesting to consider throughout the negotiations. Depending on the strength of the provider, there are basically two situations in which you can favor your provider for paying you early:
- the first has a commercial component. The common situation in this case is that the supplier has the possibility to sell to any company, even to companies that compete with you. Receiving an advance payment is a sweet enough for the supplier to give you something back, such as: a reduced price, more beneficial contract terms or some other benefits in logistics or transportation.
- the other situation is when the supplier is in the strong position of being able to choose its customers. A clear example in this case is the activity of personnel outsourcing. Often, the supplier will receive the same price from all the companies that try to hire him, and very particularly, in this sector that coexists with an extreme pressure on prices. Therefore, being able to offer quick payment terms becomes a critical element in attracting the best suppliers and, consequently, getting the customers you are trying to attract.
3.- Avoiding surprises
One thing that affects an accountant's or CFO's coronaries is the thought of having a cash position under control, and suddenly a large debit appears in the position, due to an "unexpected invoice". It could be justified by a structuring, or an uncontrolled irregularity in the approval of that purchase, but the reality is that very few organizations have any control over their overhead. Having an approved, controlled, and timely processed vendor invoice can limit the surprise factor that these invoices have over cash positions.
4.- Making the most of your liquidity
Banks are really good at maximizing their liquidity. It is a mistake to think that it takes 2 or 3 days to transfer money from one bank to another. In many countries you can transfer money in seconds when you use a third party service, but when you use your own bank it takes days. It is obvious that the bank is using that time to maximize its liquidity. The point, in this case, is that if you do not know how much and when you need to dispose of the bank's money, you will not dare to risk your liquidity. Obviously, this is not as much of a problem for small businesses as it is for large corporations.
5.- Avoiding late charges
Late payment penalties can be an option, used consciously, to keep your cash positive, but many times it is not. When it is due to a weakness in the process, we are simply throwing away the money. The solution, in this case, is to use an efficient solution to automate the process of invoices in Accounts Payable, which also allows: to measure, monitor and optimize the time of approval of the invoices. This way the Accounts Payable team will not have to run through the halls chasing approvals just before due dates.
Conclusions
Are you still convinced that the "pay as late as possible" approach is the most appropriate?
If any of the advantages of speeding up the processing time of vendor invoices by Accounts Payable has caught your attention, it may be worth exploring the cost and time savings it would mean for your organization.
If you have any questions or comments, please do not hesitate to contact us to discuss.
