With revenue growth hard to come by, it is no surprise that the C-suite is focused on increasing profit margins. What may surprise some people is where the C-suite is looking for profit growth: the accounts payable (AP) department – long perceived as a cost center in most organizations.
More C-suite executives recognize that automating AP processes provides the efficiencies, visibility and controls that positively impact an organization’s profit margins.
Here are three ways that AP automation helps organizations improve their profit margins:
1. Improved cash management
Automated solutions such as NexusPayables track and report on cash against current and future expenses. Tracking and reporting on cash flow provides the C-suite with better visibility into their income, irrespective of market or economic conditions. This enhanced visibility helps to ensure timely payments, eliminate late fees, increase investable income and return-ratios, and reduce the need for borrowing and debt. Once an organization develops a track record of early and on-time payments, it can better negotiate dynamic payment discounts that offer financial incentives. Paying invoices on time also improves a company’s credit rating, which opens the door to lower interest rates for borrowing. Automation reduces average payment cycles from 23 days to five days, according to PayStream Advisors. Best-in-class companies process invoices in 3.3 days.
2. More discount capture opportunities
Cash is tight for buyers and sellers alike. AP automation helps facilitate financing options such as early-payment discounts, dynamic discounts, electronic payments, and supply chain financing (factoring). Sellers benefit from much needed cash flow while buyers have the ability to extend Days Payable Outstanding and capture more early-payment discounts. IOFM’s 2013 AP Department Benchmarking & Analysis found that moving to higher levels of automation clears the way for AP departments to pay a higher percentage of invoices within the discount period. AP departments that take advantage of a discount term of just 1/10 net 30 earn an annualized 18 percent return. It is for this reason that capturing more early-payment discounts is the top finance and administration priority of 17.6 percent of controllers, according to research from IOFM.
3. Lower cost of goods
AP automation reduces overhead through reduced data entry, less paper handling and routing of documents, elimination of paper filing, and faster resolution of supplier inquiries. In fact, world-class organizations have AP costs that are nearly 25 percent lower than that of their peers, finds the Hackett Group. Automation also enables businesses to define rules for invoice processing to ensure compliance with price and quantity tolerances. What’s more, AP automation improves visibility into spend to help ensure contract compliance, quickly identify budget variances and maverick spend, and provide leverage for negotiations with suppliers. And AP automation reduces inventory warehouse charges. As a company’s level of automation rises, its invoice processing turnaround accelerates. Faster invoice processing speeds delivery of inventory, in turn, reducing warehouse charges.
Together, the benefits of AP automation can significantly improve a company’s profit margins.
If revenue growth is a challenge for your organization, contact us to learn how AP automation solutions from Nexus can help.