TweetYou think purchase to pay is a back office function? e-invoicing is a technical innovation? AP automation an incremental improvement to financial supply chain management? And you wonder why nothing ever gets achieved.
P2P is as boring as you make it. The reality is though, that purchase to pay, positioned properly, can deliver commercial benefits on a scale that would astound most executives. continue reading…
It’s standard business practice. Chase customers for payment as soon as possible and pay your suppliers as late as possible. Cash is king and in some industries – retail being a prime example – cash flow is the pivot of profitability that can make the difference between success and failure. But for small business way down the financial food chain late payment by their customers has become an increasingly critical issue as banks continue to keep a tight grip on their cash and in Europe and the regulators are determined to do something about it.
In October the European parliament approved legislation to crack down on late payment tactics of big business. The aim is to encourage business to move away from 60, 90 and even 120 day payment terms to 30 days and allow small businesses to claim interest when payments are made late and recover cost associated with chasing late payers.
This legislation is designed to tackle what has been described as one of Europe’s most important issues. German Socialist MEP Barbara Weiler,is reported as saying “‘It will have one of the biggest impacts you can think of.”
But what will it really mean?
The perception seems to be that late payment is always a bad thing and that prompt payment always good The legislation aims to encourage payment within 30 day
s but it gives suppliers an escape clause by enforcing 30 day terms “unless agreed otherwise in a contract”. This makes it easy for businesses to escape the legislation by taking care on the terms and conditions they impose for the supply of goods and services.
And in practical commercial terms, do the EU law makers not appreciate that business in Europe is often in competition with the rest of the world? Imposing what could in some cases be a significant and costly new way of working could have a dramatic effect on the books of European businesses who will be encouraged to source in alternative markets outside of the EU.
Let’s see the governments of Europe eat their own breakfast. Will Greece suddenly begin to pay in 30 days – or Ireland? If they do – who will fund this sudden gear change in cash requirement? Will the EU have to find yet more bail out cash?
And there is one further and fundamentally important problem with this legislation. Big business abusing the relative weakness of it’s smaller suppliers is like the big bully in playground stealing the little kids lunch money. How do you resolve that problem? By saying to the little kids “Sort it out yourself – we’ll be right behind you when you do”? Of course not! The little kid needs the support of someone bigger than the bully. If the issue of late payment is to be resolved, it needs to be done in a commercially sensitive way and sorted by government themselves – not small business.
This is typically European. It’s heart is in he right place and it’s intentions to help facilitiate trade across country boundaries by building confidence and consistency are sound. But it is likely to be ineffective. What would be more effective is legislation to encourage business to take more seriously their obligation to pay to terms agreed between buyer and suppliers by encouraging the wider use of purchase to pay techniques and technologies such as electronic invoicing that make payment processes more accurate and easy to manage. The responsibility for raising the issue of late payment should not be on the shoulders of the small business – no one bites the hand that feeds them. Payment to terms performance should be publicly reported and poor performance penalized. We’ll still have extended payment terms but they will be agreed in advance and will serve the purpose of all parties.
While the banks remain unable to oil the wheels of commerce, suppliers and buyers should be working together – without the banks – to ensure mutually profitable relationships.
TweetThere’s much talk about dynamic discounting and how it can yield significant returns on investment but dynamic discounting is absolutely not the first step in extracting value out of purchase to pay optimization – it is the final step.
Let’s go back to basics and remember that P2P is not a core function of an organization. Rather, it supports the core functions such as sourcing and procurement, accounts payable and finance. Purchase to pay develops and installs synergy across the physical and financial supply chain and uses technology to support better ways of working to reduce the cost of doing business with suppliers. continue reading…
TweetConsider these areas of potential saving. Which delivers the biggest savings in a recession?
All provide great opportunities for savings but, I have to say that if I had been asked this question, I’d have ranked the savings in that order – supplier savings first followed by working capital managemtn and intory reduction last. . And I’d have been wrong. In fact, according to the write up in CFO.com of Greenwich Associates 2010 survey of mid-sized companies in the USA, the correct ranking is the reverse of this.
Although only 17% of the midsize companies cut inventories last year, the ones that did so saved an average of almost $520,000. While only about 9% of all the companies represented in the survey cut costs through “aggressive working capital management,” midsize companies that did so saved more than $350,000 and small businesses saved more than $33,000. Those that focused on supplier saving achieved a paltry $75,000 cost reduction.
Of course, statistics require interpretation and it is likely that the SMBs surveyed would not have the leverage with suppliers that larger organizations would be able to use, but what stands out most dramatically is the relatively small number of organizations that chose to manage their working capital in order to reduce costs compared to the dramatic savings that they managed to achieve in doing so.
Is working capital management something that purchasing professionals need to have on their radar? Absolutely! Is procurement something that should be on a treasury managers’ agenda? For sure!
It’s tangible, measurable and sustainable results that seperates the men from the boys in purchasing. Procurement and P2P are as much about the management of working capital as core cash management. (See CFO 4G). And using Purchase to Pay tools and techniques like dynamic discounting delivers tangible and measurable results that have direct bottom line impact.
