But while it might be a stretch to call AP strategic, keeping it out of sight and out of mind is doing it a disservice. Firstly, you don’t know what’s going on. Secondly, you’re missing out on an important lever you could be using to achieve your company’s strategic objectives.
Accounts Payable Transformation: From Cost Center to Strategic Lever
Historically, Accounts Payable has always been considered a cost center — a back-office function whose sole focus is to process invoices faster and more cheaply. And like all back-office functions, it often gets consolidated, outsourced, and offshored. Optimization has been about getting more output with the same resources, and little more.
It’s time to think about Accounts Payable strategically
You don’t need me to tell you that Accounts Payable is a vital part of the company: it’s how you control the money. But for all that, it’s often undervalued, and alienated from the rest of the business physically (in the case of outsourcing or offshoring) — and also strategically. It’s an odd way to think about what should be the quickest lever at your disposal if you’re after rapid working capital impact.
Accounts Payable is a free source of cash, and should be treated as such. You ignore it at your peril — all the more so in uncertain, unprecedented, or otherwise precarious times like these, when liquidity and cash preservation are all-important. Run properly, AP has a potentially massive impact on not only working capital, but also operating margins and supplier negotiations.
At any given moment, you can trade off between profitability (by capturing cash discounts) and liquidity (through extended terms), depending on what your business needs. Why then focus instead on squeezing it for all it’s worth? When everything is about speed and processing costs, you get stuck with ever-decreasing returns, and no real tie back to your strategic objectives. Your execution ends up completely divorced from your strategy.
Why ‘lower cost per invoice’ is not the Accounts Payable strategy you want
Fast, cheap, touchless — they’re not inherently bad KPIs. They have their place. But lower cost per invoice is just not the right metric when you think of the enterprise as a connected ecosystem. If your goal is to process invoices as fast as you can, with the cheapest labor — that’s exactly what you’re going to get.
The result? Duplicate payments, early payments, missed cash discounts — important metrics that tend to require a little bit more sophistication fall to the wayside. By optimizing for productivity alone, a different type of inefficiency proliferates. If you want to run a department with a little bit of flexibility, you need to reconnect the operational reality of Accounts Payable to your overarching strategic goals. You need to start thinking about multi-dimensional optimization.
Optimizing for multiple outcomes
This is where technology comes in. Traditionally, AP has been about recording invoices and then paying them. It’s time to get smart about how you settle — using the data at your disposal. We’ve been working in one dimension because until now, we’ve only been using ERPs. But with an intelligent layer that combines analytics, business context, automation and a dash of AI you can have a multi-dimensional objective function. You can be fast and smart, productive and strategic. A multi-dimensional model allows you to adapt the way your AP department works depending on what you’re after as a company. Pay early and sacrifice some liquidity for profit in the form of cash discounts. But if you’re in a crunch you might need more liquidity — so you can optimize for on-time payments instead. Not too early, not too late — just right. You can avoid duplicate payments and continue to optimize costs — all based on your business priorities.