Waiting to pay a bill as late as possible may be a very short-term strategy, but it can be significantly penalizing.
A common theme in cash flow theory is to pay supplier invoices as late as possible while collecting from customers as quickly as possible. Some even justify withholding payments because it is more worthwhile to keep your money in the bank.
As providers of outsourced supplier invoice processing services, at easyap we regularly present some of the arguments that justify speeding up the invoice management process in Accounts Payable departments. These arguments include, among others:
- spend as little time as possible on the invoicing process, with the resulting savings in time and money,
- benefit from the level of control provided by WorkFlow-based technologies, or
- Process invoices as quickly as possible, which means maximum visibility in forecasting and budgeting activities.
However, considering the real value of reducing the time required to have an approved supplier invoice available for payment, is this a critical objective for the company, taking into account this CashFlow theory?
Let's take a closer look at some of the advantages of reducing the number of days needed to process a supplier invoice. After this, you can still choose to pay as late as possible, or take advantage of some of the benefits listed below.
1.- Discounts for prompt payment
When the global credit crunch hit, many organizations took extraordinary measures to ensure a positive balance in their cash accounts, including, for example, payment delays, forced returns, inventory reduction, and even selling invoices (factoring). In the latter case, factoring, did you know that the global factoring market is now worth around €2 trillion? That's money out of your pocket!
So, let's look at the discount opportunities that are often hidden in a slow manual process of managing supplier invoices.
A common discount starts in the range of 2 to 3 percent of the negotiated payment terms. This discount is often binary, meaning that, for example, payment within the first 10 days earns a 2 percent discount, but after the 11th day, the discount is zero.
Another way to take advantage of this discount is through negotiated dynamic discounts. This type of discount offers a sliding scale, with a full discount if payment is made on the first day and no discount if payment is made on the due date, with a sliding scale between those two points. The following chart shows that savings of up to 25% can be achieved on an annual basis.
2.- Obtain the best terms from the supplier
It is no secret that all suppliers want to be paid as soon as possible to reduce their AOP (Average Payment Period). This fact is worth considering throughout the negotiations. Depending on the strength of the supplier, there are basically two situations in which you can favor your supplier by paying them early:
- The first has a commercial component. The common situation in this case is that the supplier has the possibility of selling to any company, even companies that compete with you. Receiving an advance payment is enough of an incentive for the supplier to give you something in return, such as a reduced price, more favorable contract terms, or other benefits in logistics or transportation.
- The other situation is when the supplier is in the strong position of being able to choose its customers. A clear example of this is the outsourcing of personnel. Often, the supplier will receive the same price from all the companies trying to hire them, particularly in this sector, which is subject to extreme price pressure. Therefore, being able to offer fast payment terms becomes critical to attracting the best suppliers and, consequently, obtaining the customers you are trying to attract.
3.- Avoid surprises
Something that affects the coronary arteries of an accountant or CFO is thinking that they have the cash position under control, and suddenly a large debit appears in the position due to an "unexpected invoice." It could be justified by structuring, or by an uncontrolled irregularity in the approval of that purchase, but the reality is that very few organizations have any kind of control over their indirect expenses. Having a supplier invoice approved, controlled, and processed on time can limit the surprise factor that these invoices have on cash positions.
4.- Take advantage of your liquidity
Banks are really good at maximizing their liquidity. It is a mistake to think that it takes two or three days to transfer money from one bank to another. In many countries, money can be transferred in seconds when using a third-party service, whereas when using your own bank, it takes days. It is obvious that the bank is taking advantage of this time to maximize its liquidity. The issue, in this case, is that if you do not know the amount and the time when you need to access the money in the bank, you will not dare to risk your liquidity. Obviously, this is not as much of a problem for small businesses as it is for large corporations.
5.- Avoid late payment fees
Penalties for late payments can be an option, used consciously, to keep your cash flow positive, but often this is not the case. When it is due to a weakness in the process, we are simply throwing money away. The solution, in this case, is to use an efficient solution to automate the Accounts Payable invoicing process, which also allows you to measure, monitor, and optimize invoice approval times. This way, the Accounts Payable team won't have to run around the hallways chasing approvals just before due dates.
Conclusions
Are you still convinced that the "pay as late as possible"approach is the most appropriate one?
If any of the advantages of accelerating the processing time of supplier invoices by Accounts Payable have caught your attention, it may be worth exploring the cost and time savings this could mean for your organization.
If you have any questions or comments, please feel free to contact us to discuss them.
