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Financial Process Automation

There’s Always Money in the Banana Stand

“There’s always money in the banana stand.” Fans of the hit television show Arrested Development will recognize the phrase immediately. On the show, the protagonist, Michael Bluth, is doing his best to keep his family and their fortune intact when their business is imperiled by the incarceration of his father and CEO of the Bluth Company, George Bluth, on account of shady dealings. When the family’s problems appear to be most dire, and everything they’ve worked for seems likely to disappear and leave them destitute, George repeatedly assures his son, “there’s always money in the banana stand.”

The “banana stand” refers to a small hut where the Bluths sell frozen bananas on a local boardwalk, essentially a trifle where Michael’s teenaged son, George Michael, can work for the summer. Michael understands this phrase to mean “no matter what happens to the Bluth Company, we will always be able to generate a small bit of income from selling frozen bananas.”

SPOILER ALERT: When the banana stand burns down one day, the hundreds of thousands of dollars in cold, hard cash hidden in the walls go up in flames with it.

What does this quirky plot have to do with accounting processes and automation technologies? It’s simple. When your business is in need of cash, sometimes the answer is right under your noses, in a place where you least expect to find it.

Pursuing the profitable accounts payable department

The term “profitable accounts payable department” may seem like an oxymoron to some. Accounts payable is where bills are paid; if anything, it’s the biggest cost center in the entire enterprise, a necessary evil to keep the supply chain intact and ensure the business has the resources it needs to persist. However, an efficient accounts payable department today can easily become a source of cash.

Innovative companies have taken to viewing invoices not merely as bills to be paid, but as commodities to be “traded” to achieve a high return with little risk.

Consider these figures. For a business with $1 billion in AP spend annually, the AP department is likely to employ between 10 and 40 people at a cost of $500,000 to $2 million. On average, this department is failing to take advantage of 20 percent of the discounts vendors are offering, at an average discount of 1.5 percent. The savings opportunity there is $3 million…a sum greater than the department’s annual operating costs. What would it mean to your company if you could produce an additional $3 million each year, through discounts, working capital optimization or other methods? More importantly, what does it mean to be a self-funded department?

Nearly every business views cutting costs as a key goal. When selecting new internal initiatives, organizations should give preference to projects that deliver clear value to the operation, be it through analytics, new revenue opportunities or new business models—yet many give priority to shrinking operational costs instead. When your AP department is self-funded, however, it creates an opportunity to pursue new, value-added activities that could benefit the company for the long term.

By shifting the average vendor pay terms for $1 billion of annual spend by one day, you make $2.7 million of working capital available to the company. For many businesses, that kind of cash would come in awfully handy.

A strategy for success

When pursuing the profitable accounts payable department, you must first determine what is most important with regards to how your business manages cash. How large are your cash reserves, and where are they? What is your cash cycle? Is your company privately owned or publicly traded, and as such, what regulations constrain you?

Second, you must have a sense of what opportunities exist between you and your vendors. Who are they—are they large businesses or small, near or far? Have discounts (or extended pay terms) been discussed previously? Do you hold any leverage with these vendors—is your business of substantial importance to them, and might both terms and price be negotiable? Many vendors use a revenue share model for cash management, and are therefore committed to your success in these projects.

Third, you must ensure all necessary parties are involved internally. Cash conversion is a cross-departmental topic with numerous variables and drivers; no single department can handle it alone. You need AP staff to cover the operations; Treasury owns cash management, Procurement owns the vendor relationships, IT owns the technology and Finance understands the impact this will have on the business as a whole. Involved parties can be divided into an executive steering committee to meet and assess regularly, an empowered user team to design and implement the strategy, end users who understand their role, and a team accountable for change management, training, education and adoption. Collaboration is key; internal IT or Finance projects often fail or have a negligible impact because they lack dedicated resources and knowledgeable partners.

  • Some things you may wish to consider:
  • Just because your vendor contract does not include discounts does not necessarily mean they are not available. A supplier may wish to take a discount—be it regularly, or under a unique circumstance—outside regularly contracted terms. For instance, these discounts can be made available at specified price thresholds, which toggle said discounts to maximize the advantage for purchaser or supplier.
  • Discounts are but one way to assign value to a payment opportunity discussion; payments can be shortened or extended to optimize each opportunity as needed.
  • Some content discounts interfere with hedging, but currently available automation tools and predictive analytics deliver AP visibility sooner and with greater accuracy than ever before.
  • When working among internal departments, understand that everyone has their own departmental focus and targets, some of which may be in conflict. Remain focused on the “big picture”—long-term benefits to the company as a whole—instead of departmental KPI impact.
  • Stakeholders must put themselves in a revenue generation mindset. Achieving a higher return demands an investment of time, effort and money.
  • Once you make your plan, set a timeline and clear definitions of “success” and “failure.” Too many projects linger on because it’s unclear whether they are finished.

Automation is essential

An enduring hindrance to making AP profitable has long been the inability to capture discounts due to long AP cycle times. Ideally, a three-day cycle time for invoices is best; most discounts are available if a payment is made within 10 days, but it’s wise to allow seven days for delivery, routing and payment scheduling. To achieve this target and capture the greatest possible number of discounts, AP automation—including any combination of intelligent data capture, enterprise content management (ECM), electronic invoicing and dynamic discounting that befits your unique AP environment and its vendor landscape—is generally necessary.

While much has been written in InContext about the nature of intelligent capture, ECM platforms and e-invoicing, perhaps it is best to elaborate on the nature of “dynamic discounting.” Dynamic discounting is a “sliding scale” discount that can be offered at any time during the payment period. Such discounts might be offered by vendors who do not normally negotiate discounts, but may need available cash at certain times. As a result, the return on dynamic discounting—which works best with some sort of portal or online network to facilitate the ask/bid offer and a way to manage the discount program—can be much higher than traditional discounts. It essentially optimizes the opportunity for both vendor and payer to benefit from flexible pay terms, as conditions arise. Dynamic discounting remains a relatively new offering, but rapid growth is predicted, and some banks have even started to offer dynamic discounts with supply chain financing in blended models.

Many businesses can attest to the effectiveness of automation technologies in capturing vendor discounts, thus contributing to the profitable AP department. AEG Worldwide, one of the world’s leading presenters of sports and entertainment, leveraged AP automation to achieve a 60 percent reduction in invoice processing time, enabling them to increase discounts captured while eliminating thousands of dollars in late fees. Siemens Global Shared Services is using AP automation to pursue a policy of capturing 100% of available discounts. World Wrestling Entertainment, Inc. (WWE) is similarly using the technology to capture such discounts, while Ardent Health Services and North Kansas City Hospital have also observed success in doing so.

Indeed, there’s always money in the accounts payable department, and you need not burn it down to realize it. All you need is an internal team committed to process and cash management improvements, vendors looking to improve their own cash management and the right technology to make it happen.

View webinar presentation, Think Profitable: Unlock the Value of Your Invoices, to learn more about converting your AP department into a source of profit.

And if you haven’t already done so, watch Arrested Development sometime. It’s a brilliant show.