How AP Automation Improves Cash Flow

Updated: Apr 25


When it comes to managing cash flow, companies seek out ways to buy fewer pens, travel less or make products with cheaper materials. Far too often companies overlook opportunities to increase cash flow - by simply evaluating and streamlining processes in critical functions, like Accounts Payable. Accounts Payable in typical middle-market firms consists of several employees, manual processes, and mounds of paper invoices stored in file cabinets and banker’s boxes. Identifying improvement opportunities and implementing solutions like automated workflows will reduce the time it takes to move an invoice through the payables cycle, allowing the company to take advantage of purchase discounts and maintain good relationships with vendors. It also creates opportunities to reduce costs with fewer employees or utilize those employees in more value-added areas of the department.


The National Center for the Middle Market notes that companies can save millions by making AP processes more efficient. Improving metrics like DPO (Days Payable Outstanding) by just a few days can create significant free cash flow. DPO measures the number of days it takes a company to receive and pay an invoice. The goal is to manage DPO so that it’s not too high, indicating a company could be struggling to pay bills or too low, which could mean the company is paying bills before it needs to and not taking full advantage of the repayment period allowed by vendors. DPO has to be evaluated relative to the number of days it takes a company to collect money from its customers. If it takes a company 30 days to collect from customers and 35 days to pay invoices, for example, cash is available 5 days in advance of payments due to vendors. Conversely, if the company receives money in 40 days with payments due in 35 days, the 5-day gap could create cash flow problems and disrupt other parts of the business.


Beyond paying a company’s bills, the Accounts Payable function is key to managing working capital needs. Most AP departments have manual processes that require lots of paperwork, slow approvals and frustrated vendors wondering when they will get paid.


So how does optimizing the Accounts Payable function save your company hundreds of thousands, even millions of dollars? Consider these three methods that can reap huge savings this year and beyond.


1. Take advantage of early pay vendor discounts.

Vendors like to get paid. On time. To incentivize customers and guarantee invoices get paid, many vendors offer discounts for paying early. A common discount is 2/10, net 30 (“two ten, net 30). In other words, the vendor offers a 2% discount to pay within 10 days, otherwise the full amount is due within 30 days. Considering a company that processes thousands of invoices annually, 2% off each one adds up significant cash savings.


The challenge here is that many discounts are lost because of the lack of efficiencies in the payables workflow. When an invoice is received, it can take several weeks for it to be approved, coded, paid, and mailed to a vendor. An automated solution will eliminate the time lost by electronically routing invoices for approval, an added convenience for busy department managers who juggle competing priorities.


Managing relationships with vendors is key to negotiating discounts and payment terms. If discounts are not offered, initiate a discussion with your vendors. It’s hard to believe that a vendor will refuse money because for them, the longer an invoice goes unpaid, the greater the chance of it never getting paid. Early pay discounts also benefit the vendor because they can analyze customers’ payment trends which is useful for projecting their cash flow and making operating decisions about their business.


2. Utilize purchasing cards for rebates.

Not only is a purchasing card (or p-card) great for tracking expenses, it’s a great opportunity for a company to get cash back for everyday purchases like office supplies, travel, and utilities. The amount of the rebate is based on annual spend dollars and averages between 1-3% - sometimes double-digit rebates for high-volume purchases. For example, if a company spends $5,000,000 per year on a p-card with a 3% rebate, they will receive up to $150,000 of that cash back as a rebate just for paying business expenses – something they have to do anyway. This is additional cash to invest in the business, generate more revenue, and improve processes.


P-cards are a logical alternative to issuing paper checks to pay expenses. Check writing in general has declined as banks and companies move toward digital solutions for handling transactions. Most digital payments occur instantly, eliminating the time spent printing and mailing checks, which costs more money.


3. Know when to hold (and when to pay).

From a treasury perspective, companies look for ways to maximize returns through investments and cash savings. Improving cash position involves making good spending decisions at the right time. Consider an interest-bearing account that pays 3.5% interest on deposits and vendor invoices that offer a 2% early pay discount. While paying 2% less on each invoice sounds like a win, the 3.5% earned from the bank is greater than the 2% saved by paying an invoice early. In this case there is no incentive for a company to pay invoices early – the better approach is to utilize the full repayment time to pay the invoices, hold on to more cash and earn more interest on the bank balance.


Improving Accounts Payable processes is beneficial to a business in many ways. Besides the cost savings and extra cash flow, AP automation makes paying bills easier for both the company and its vendors. Companies can move invoices through a pre-routed workflow for approval, coding and payment – reducing the need for manual intervention and avoiding late payment penalties. Bills are paid timely and vendors get paid faster, creating leverage for companies to negotiate more favorable payment terms in the future. The benefits of an automated payables system extend to other areas of the business with options like customizable management reports for decision-making, stronger internal controls with paper trails of transactions and fewer manual errors which enhances the control environment and accuracy of data.


Whether you’re just starting out or having a thriving multi-million-dollar business, most companies are after the same goal: do more with less. Make more money. Improve processes. The 3 keys to improving cash flow are things that you have to do in your business anyway. You have to order supplies and pay your bills – why not take what you already have to do and monetize it? These are the best practices I share with entrepreneurs to help them improve the “back office” in their business. I’d love to create a plan for your business to be successful and find creative ways to get money for your business – with 0 or 10,000 clients. Regardless of your industry or size, you must know your numbers because they are the story of your business. What are your numbers saying about you?


I'm sharing more business tips on episode 4 of The WERKin' Mommas podcast. Tune in for some little known tax tips and how to make more money moves! Listen here.


~Nikki


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