EXECUTIVE SUMMARY
Strategic management of accounts payable and accounts
receivable — especially in uncertain economic times — can play
a critical role in a company’s short-term survival and its long-term
success. This white paper demonstrates how taking a strategic
approach to these critical functions and looking at them as
integrated processes occurring on an integrated continuum can
pay off in signicant benets — including increased cash ow,
reduced transaction and operating costs, time savings — even
improvements in sales and revenue.
TABLE OF CONTENTS
Improving Cash Flow
with Effective AR and
AP Management ........ 2
Strategic AR
Management ..........2
Strategic AP
Management ..........4
Conclusion. . . . . . . . . . . . 5
Strategic Approaches to
Managing Accounts Receivable
and Accounts Payable
MARCH 2012
STRATEGIC APPROACHES TO MANAGING ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE 2
IMPROVING CASH FLOW WITH EFFECTIVE AR AND AP MANAGEMENT
Taking a strategic approach to accounts receivable (AR) and accounts payable
(AP) management is always advisable. In economically uncertain times, it is
imperative. “We are in an interesting time, where very large companies typically
have substantial liquidity and are having a difcult time getting historical rates
of return on that liquidity,” says Jeff Minick, senior vice president and manager,
commercial banking treasury solutions, Bank of America Merrill Lynch. “A majority
of mid-market companies don’t have that luxury; therefore, they need to squeeze
everything out of the cash they have.” The best way to optimize cash is to have
very efcient payables and receivables. Without that, you have higher costs and
more risk, neither of which is attractive to businesses, he adds.
Prioritization and resources are the two keys to strategic management of AR and
AP, and the size of the challenge correlates with the size of the company’s staff.
“The smaller the company, the more responsibilities each employee has,” Minick
notes. “Efciency is critical to survival. I often ask clients if they would rather hire
another salesperson or another accounts payable clerk. Efcient payables and
receivables processes allow them to hire more salespeople.”
No matter what the business climate, cash is always king, says Wayne R. Pinnell,
CPA, managing partner of Haskell & White, LLP, a multi-ofce accounting and
business advisory rm in Southern California. “That means businesses need to
focus on cash ow and build their reserves,” he says. While capital markets are
in the early stages of a recovery, having a good cash ow remains vital to long-
term success. Strategic AR and AP management can have a signicant impact
on that success.
With sales down and operating expenses up, the only area that offers any potential
for capturing incremental value or prot is in the middle space between the price
of a sale and gross prot, says Patricia Sigmon, founder of LPS Consulting and
author of Six Steps to Creating Prot. That means this is a C-level issue, not just
an accounting exercise. “We don’t want to spend more money, increasing costs on
collections, nor do we want to pay interest, penalties, or excessive expense on our
payables,” she says. “From the initial point of sale, when AR can be designed to
be most favorable, to the actual payment of all expenses, a senior ‘eye’ must be
managing every piece of this puzzle for maximum prot intake.”
STRATEGIC AR MANAGEMENT
Minick suggests approaching AR management as an integrated process
occurring along a continuum: Marketing/pitch of product or service to be sold >
Sale of product or service > Provision of product or service > Collection of funds.
STRATEGIC APPROACHES TO MANAGING ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE 3
Starting the AR process early — at the beginning of the sales process — can
reap many benets later. “We encourage our clients to get their salespeople to
include terms and payment in the conversation,” Minick continues. “We’ve spent
many years running conversion programs for our clients, where we attempt to
get their customers to pay them electronically. If a business can negotiate to get
paid electronically at the beginning of the sales process, it can save both time
and money.”
Pinnell agrees that starting the AR process in the early stages of a new business
relationship is critical. He recommends evaluating the customer’s AR exposure
from the initial sale and establishing credit limits for all customers — and
monitoring and adhering to them throughout the relationship. “Don’t be afraid to
contact customers about past-due payments, as this may be the rst sign that
they are experiencing nancial difculties,” he advises. Failure to take prompt
action can lead to a more signicant loss downstream. If a customer’s nancial
situation changes, consider modifying the terms by changing to COD or COD+
(cash for a new order with payment toward outstanding balances), he adds.
A well-designed AR management strategy can have a positive impact on a wide
range of other business functions, including sales and marketing, customer
service, and operations. By speeding up the AR process, a business can make
it easier to manage at all points in the continuum and account for their funds
sooner, Minick says. It also provides the necessary tools to follow up with slow-
pay customers. “In the end, a business’s grasp of liquidity will be better, enabling
it to speed up product/service launches, gain a rmer grasp on how quickly a
sale leads to revenue, and focus more time on other aspects of the business.”
Adopting a nancial process optimization strategy
Today, more than ever, organizations are leveraging business intelligence in order
to optimize cash ow. “The key to capturing signicant savings and ongoing boosts
in cash ow is investing in nancial process optimization, says Mary Driscoll,
senior research fellow at APQC, a member-based nonprot that specializes in
benchmarking, knowledge management, measurement, and process improvement.
Treasurers at many companies tend to be focused on essential functions
such as general accounting, cost control, meeting audit requirements, tax
management, and closing the books — all of which are critical to the successful
operation of the business, Driscoll acknowledges. “This [nancial process
optimization] can dramatically free up accounting staff from performing low-value
transaction work that’s much better done with the aid of automation.”
Businesses benet when in-house nance people perform the analysis needed
to understand the payment patterns of key accounts and use that knowledge to
optimize cash ow. Too often, companies lack that analytical bandwidth and end
STRATEGIC APPROACHES TO MANAGING ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE 4
up “on a back foot and at the mercy of frequent cash-ow squeezes,” Driscoll
says. The reason is that even the most capable in-house accountants often lack
a natural inclination to focus on cash in-ow optimization and the impact that
strong working capital management can have on balance sheet strength.
“The rst step [to implementing AR process optimization] is to gure out what
the burning issues are,” Driscoll adds. “Are you spending too much? Do you
need to bring down costs? Do you need to do a better job of leveraging the
analytical talent you have on staff who are, unfortunately, bogged down in low-
value, repetitive transaction processing tasks, such as manually gathering data
from disparate systems to generate invoices from customers?”
STRATEGIC AP MANAGEMENT
Cash management practices can play a critical role in both a company’s short-
term survival and its long-term success. Maintaining sound reserves is a
vital strategy in planning for a rainy day. It also provides the opportunity to
make prudent, long-term investments in the business. “A vast number of the
casualties of the recession were a direct result of insufcient cash reserves,”
Pinnell observes.
Managing short-term cash provides businesses with a better idea of what
debt facilities they truly need and how much nancing to request to cover any
seasonal activities, Minick notes. Having an accurate grasp of those two items
can help speed the approval process when applying for loans and lines of credit.
Look for ways to minimize nance charges
First and foremost, take advantage of discounts that are offered for paying early,
and delay payment until the end of the allowable payment cycle on transactions
that offer no discounts, Pinnell suggests. In the current environment of very low
returns on traditional safe harbor investments such as Treasury bills, discounts
offered for early payment often present an attractive alternative.
One of the easiest and most effective ways to optimize the AP cycle is to
leverage credit cards as a payment vehicle, Minick says. No-interest credit cards
can provide up to a 90-day, interest-free window in some cases. “Depending on
card cut-off dates and how they match up with your invoice payments, you have
up to 30 days before each new charge is included on a statement and another
30 days after that before the payment has to be made,” Sigmon explains.
“If you negotiate 30-day terms with your vendors, you can stretch the actual
payment to 90 days.” In addition, many credit cards offer rewards programs, and
accumulated points can be used for a variety of business uses, including travel
and ofce equipment.
Best Practices in AR
Management
While there is no handy cookbook
for end-to-end AR process
optimization, organizations like
American Productivity and Quality
Center (APQC) and the Institute
of Financial Operations offer a
vast body of knowledge about
performance levels and AR best
practices.
APQC Open Standards Research
has found that average cycle time
to generate complete and correct
billing data varies widely between
top and bottom performers, from
six days for the latter to just one
day for top performers. Companies
can improve their AR management
performance by adopting best
practices such as:
y Focusing on credit management
y Shortening payment terms
y Offering early payment discounts
y Eliminating barriers to payment;
offer electronic payment options.
y Billing promptly and electronically,
wherever possible
y Using new technology to automate
the payment processing function
or to improve existing automated
processes
y Establishing a billing dispute
resolution process
y Establishing a proactive collection
process with early intervention and
offering incentives to collections
personnel
y Monitoring ARs on at least a
weekly basis.
STRATEGIC APPROACHES TO MANAGING ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE 5
Automate the primary AP cycles
Reducing transaction costs and automating AP processes can return signicant
savings for many businesses. According to research by Aberdeen Group, mid-
market companies experience AP transaction processing costs 32 percent
higher than industry averages, and they are twice as likely to make improper
payments as their industry peers. Adopting best practices, especially process
automation, is an effective way to address that disparity. Companies identied
as best practice rms by Aberdeen Group reported invoice processing costs
averaging 84 percent less than those of their peers with invoice processing cycle
times averaging 59 percent faster. Industry best-in-class companies incurred an
average cost to process an invoice of $2.18 vs. an industry average of $9.38;
invoice processing cycle times were 2.8 days vs. 15.8 days.
Companies that fall into the industry best-in-class category tend to have a
number of AP management strategies in common, according to Aberdeen Group’s
research:
y Enterprise-level visibility into AP processing
(70 percent for best-in-class vs. 53 percent for industry average)
y Segmentation of vendor base for electronic and manual payments
(80 percent vs. 47 percent)
y Use of automated invoice imaging and workow solutions
(55 percent vs. 49 percent)
y Ability to measure process cycle times (44 percent vs. 39 percent)
y Use of online/Web-based reporting (50 percent vs. 14 percent)
y Comprehensive AP automation (44 percent vs. 34 percent).
“Really, a more strategic approach to AP all comes down to deploying technologies
that automate the primary AP cycles of receiving, coding, review and approval, and
remittance to pay,” says Max Leisten, market director at SciQuest, a multinational
provider of e-procurement solutions. He pegs typical processing cost-per-invoice
(CPI) for manual AP practices as high as $30 – $40, but says that with end-to-end
application of technology across all the primary AP cycles, CPI can drop to about
$2. “That’s fairly dramatic data in an economy where every dollar counts,” he says.
CONCLUSION
Managing both sides of a company’s cash ow is important to every business in
today’s economy, and strategic approaches for improving AR and AP performance
have a lot in common, especially the important roles technology and automation
can play. At the same time, for these management approaches to be truly
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STRATEGIC APPROACHES TO MANAGING ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE 6
strategic, they cannot be treated as mere accounting functions. C-level guidance
and input is a must, and research shows that companies where management
has visibility into AR and AP processes perform best in those areas.
In the end, strategic management of AR and AP is not just about saving money,
it’s about improving overall business performance by freeing up resources
and time that can be devoted to a company’s more mission-critical business
activities.
