As the role of AP is increasing in importance to finance, we sat down with Robert Cohen, Vice President of Research for research and advisory firm Ardent Partners, to talk about what’s behind this trend, what’s on the minds of CFOs and how companies can best leverage AP analytics in their organizations.
Here are some highlights from our discussion:
Dooap: Why are AP analytics so important to CFOs?
Bob: It all starts with visibility. Accounts Payable represents one of the largest – if not the largest – cash outflows from an organization, often neck-in-neck with payroll. Having visibility into where this money is going, what it’s being used for, and whether it is being used effectively is critical for sound financial management.
When CFOs have visibility into their spend and cash flow, they can better manage profitability. As businessman and author, Robert T. Kiyosaki, once said, “It’s not how much money you make, but how much you keep and how hard it works for you…” While he was talking about personal finance, the same holds true for corporations. With large sums of money leaving the company in payables, CFOs need to be sure that they are spending wisely and making the most out of their capital in order to improve profitability and have the funds they need for investment and new opportunities. This all boils down to measuring and monitoring key AP metrics.
CFOs also need to monitor compliance. This not only helps ensure compliance with government regulations, but also internal ones, so they can safeguard against fraud – which unfortunately happens all too often in AP. Having visibility – and implementing controls – are critical for this oversight.
Another area of concern for CFOs is the organization’s reputation. Visibility can shine light in dark places – uncovering any problems and obstacles that need to be addressed – such as late payments that can impact relationships with vendors.
Dooap: What role do controls play and why is automation critical?
Bob: Visibility and control go hand in hand. Visibility lets CFOs see what’s going on and controls enable them to rein in any problems and manage effectively. And, that’s why automation is so important. It’s virtually impossible to see all the invoices across an organization – on people’s desks or wherever they might be – without having an automated solution in place. With automation, a company can record every invoice, including all the data in it and everything that happens to it as it gets processed. And, automated controls enable them to enforce policies and compliance.
Dooap: How are CFOs using AP metrics?
Bob: As the saying goes, “you can’t manage what you can’t measure.” CFOs can use AP metrics to help manage their finances more effectively, make more informed decisions, and be able to know, for example, that they have the cash on hand to take advantage of business opportunities.
With AP metrics, they can evaluate whether they are getting the best return on capital by optimizing payment terms; managing strategic payment plans; maximizing working capital and managing it across payment cycles; and improving profitability.
Dooap: What type of KPIs are CFOs most concerned with?
Bob: They want to monitor metrics around cash flow, including how much the organization is spending, what payments are being used for, their outstanding liabilities and Days Payable Outstanding. In addition, compliance and reducing risk are also of concern. CFOs want to be sure the company is paying money to legitimate suppliers and that the organization can spot and thwart fraud before it happens.
Dooap: How can AP metrics be used by other parts of the organization?
Bob: With visibility into outstanding liabilities, Treasury can know how much cash is on hand so they can better manage cash flow and working capital. Finance can use AP data to manage how they are trending against the budget on a monthly basis, and determine strategic payment plans to optimize cash. Procurement can better track and manage spend and look for ways to save money through volume discounts, early payments and, of course, avoiding late payment penalties.
Dooap: What are roadblocks to AP automation?
Bob: Given that there is a proven business case, quick ROI, and easy implementation, what’s stopping companies from moving ahead? The major roadblocks are inertia and resistance to change. Getting a clear mandate and support from management is critical to overcoming these obstacles.
Dooap: What advice would you give companies about getting their finances in order?
Bob: Visibility and control are absolutely critical to managing finances and achieving sound financial health. However, it’s near impossible to be able to see what’s going on and manage AP effectively without automation – and at no time has that been more apparent than now, during the pandemic. Having to go into an office to pick up paper invoices and process and route them manually has been extremely difficult and time-consuming. Companies that are trying to do this all manually are struggling to pay vendors on time, and have diminished capability to manage the bottom line, working capital, spend and cash flow. That’s not a good place to be in right now.
It’s time for companies to overcome their inertia and start the AP automation journey by getting rid of paper and manual processes. It’s important to remember that this is just the first step, and those already on the way should focus on achieving continuous improvement. As companies reach higher levels of automation, they will receive greater value and business benefit.