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9 Strategies for
Writing Accounts Payable Procedures
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by:
Chris
Anderson
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You have
permission to publish this article free of charge, as long as the
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The Cash to Cash Cycle
Part Four of Series
Part One: http://www.bizmanualz.com/articles/01-05-05_inventory_procedures.html/?ART78
Part Two: http://www.bizmanualz.com/articles/01-11-05_accounts_receivable.html/?ART79
Part Three: http://www.bizmanualz.com/articles/01-18-05_Sales_Marketing.html/?ART80
Next Week: Complete Cash to Cash Cycle
The white flag is just a nose away…toward the Million dollar prize
in cash savings for your business…
So far, in Inventory and Accounts Receivable, we've found $250,000
each in cash savings. Then we found another 250K in Sales and
Marketing. And so, now, Accounts Payable is the final process within
the Cash to Cash Cycle - and also the final $250,000.
The cash cycle is undoubtedly the single most important process to
optimize for any business – from when you spend money to when you
get money.
Circling the Cash to Cash Cycle
So let’s tie this back to accounts payable - the event that pays for
the liability incurred by purchasing, which is for inventory
required by manufacturing to meet demand. Sales generate this demand
that creates the accounts receivables, which is turned into cash.
And now we have come full circle and completed the discussion on the
cash to cash cycle.
Increasing the Velocity of Accounts Payable Processes
Your accounts payable is a bit different than the other processes we
have examined so far. The first three processes we looked at
represented processes where the focus was on reducing the size of
assets (inventory or accounts receivable) or expenses (marketing)
and increasing the velocity or cycle time. But in accounts payable
our focus is on increasing the size of the asset, while maintaining
a solid credit rating - and increasing the velocity of the process.
Now let’s look at how to find $250,000 in accounts payable savings.
If your organization has $500,000 in accounts payable each month,
then STOP! We can find $250,000 in savings right here. Where, you
ask? Increasing payables by 25% will produce $125,000 in cash plus
$125,000 from automating tasks, taking more discounts, and managing
the process better.
Service Business Procedures Case Study
An organization with $600,000 in monthly payables needed assistance.
We examined their payables process to understand and quantify
workflow, paper processing and credit issues. Then we designed and
implemented a process to increase their use of payables and
discounts, improve their payables cycle efficiency, and tie it to
their purchasing and receivable cycles. We then reinvested $50,000
back into an Enterprise Resource Planning (ERP) program to automate
some of the processes that weren’t automated already.
The metrics we developed reduced their purchasing & payables
expenses by 25% and increased their efficiency from 50% to 75%
within 2 months of implementing the new procedures. With these new
processes and reports, the company now tracks payables cycle
efficiency and average days payables, rather than just bills paid on
time or outstanding balance, as the measure of their payables
effectiveness. The result: an extra $300,000 in cash plus a 50%
increase in process capability (capacity).
But how?
Methods to Design Your News Accounts Payable and Accounting
Procedures
• Eliminate Paper. The single biggest cost for any purchasing and
payables department is paper, including: purchase orders, purchase
order follow-up, small-dollar purchases, delivery tracking &
receipts, and vendor payments. Utilizing paperless invoices,
Web-based supplier self-servicing, centralized vendor files,
automated workflows for electronic or imaged invoices (see ERP
below), and payment methods, such as business credit cards,
Electronic Data Interchange (EDI) and Electronic Funds Transfer (EFT),
can reduce paper handling costs by as much as 90%.
• Integrate ERP Systems. Enterprise Resource Planning (ERP)
automates the purchasing and payables functions, which allows a
company to get more work done with fewer personnel. Also, electronic
invoice matching applications save time in retrieving paperwork. It
is estimated that an ERP system can annually save an organization
$300 per million in sales.
• Increase Payment Terms. Negotiate payment terms based on receipt
of goods or the invoice. This can add one week or more to your
terms, which can be 25% of 30 day terms. Use EFT for just-in-time
payments to maximize your payables terms and minimizing the impact
to your credit.
• Take Payment Discounts. If you are getting 2%/10 net 30 terms,
then consider taking it. This means you are offered a 2% discount if
you pay within 10 days, instead of the normal 30 day terms. This
translates into an 18% return on your capital, and for many
organizations this is a good return on your investment.
• Review Purchases. Purchasing is a continuous process that requires
continuous review. Consider: transportation charges, expedited fees,
odd lot penalties, new pricing, new products, consolidating vendors,
new vendors or buying groups, payment terms, and more. Communicate
with your suppliers to improve the process. And review and monitor
everything to account for changes in your environment.
• Communicate with Suppliers. Communicate with your suppliers to
improve the process. Ask suppliers to submit their invoices
electronically. This will save you time, resources and losses due to
waste.
• Eliminate Disputes. Disputes with your suppliers are typically the
result of a problem with your purchasing/receiving process. When
disputes occur, review your purchasing procedures to ensure that
they are producing the correct metrics and that you are not forced
to pay for your mistakes.
• Reduce Errors. Overpayments, payments made to the wrong vendors,
fake invoices, or even late payments represent a common problem for
payables. Increasing your focus on error control, along with written
procedures and audits, can reduce these errors considerably.
• Train personnel. Provide your accounts payable staff with regular
formal training. This will arm them with better knowledge of frauds,
negotiating skills, and an understanding of the economics of
payables – which will result in improved effectiveness.
Accounting Policies and Procedures for Cash in the Bank
In the past few weeks, we have showed you four parts of your
financial statements that will each contribute $250,000 in cash
savings. The last hurdle was Accounts Payable, and we sailed through
it. And now we have crossed our final goal: $1,000,000!
Time was - and is - the key. All you have to do is own it. And,
remember, next week we will put together each of the four elements
of the cash to cash cycle, and look at how it affects the working
capital of your business.
About the author:
Chris Anderson is currently the managing director of Bizmanualz,
Inc. and co-author of policies and procedures manuals, producing the
layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit:
http://www.bizmanualz.com?src=ART81
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