Your Company Deserves Payment Control

There are many steps, people, processes, and systems involved in the journey involved in creating an invoice and paying a supplier. As such, there are many opportunities for friction and resulting inefficiency which drive up the cost of making payments. The good news is that cost-effective technology exists that companies are leveraging to deliver the visibility and functionality to identify and address areas that need improvement. Does your company have the control you deserve over how payments are made, what types of payments are made, and when payments are made?

Control Over How Payments are Made

• Removing paper
• Mitigating process bottlenecks
• Removing productivity friction in the form of time-wasting activities from all those involved in the processing of payments including AP professionals, Treasury professionals, Finance professionals, and your suppliers is what control over how payments are made looks like. 

This control also encompasses mitigating risk exposures and having a clear audit trail from procure to pay (P2P).

Control Over What Types of Payments are Made

Lowering payments processing costs via AP automation can have a meaningful impact on a company’s bottom line, and help AP get the attention it deserves. These costs can be dramatically lowered by converting suppliers to being paid via electronic payments from ACH to checks and by paying suppliers via card payments using cards that offer rebates for use.

This can be done by working with suppliers to educate them as to the costs and benefits to them in accepting certain payment types and offering them your recommendation without pushing them to an electronic payment type that is best for you and offers your company a rebate. However, a few words of caution, supplier relationships matter and damaging them by forcing/strongly suggesting suppliers be paid on your terms (how you want to pay them) can “inhibit company growth.” Those are words that will make any CFO cringe.

Control Over When Payments are Made

Time is money and when payments are made they have costs to you and your suppliers.  Discounts offered by suppliers not taken are most often opportunities lost. A quick example, my supplier offers to give me a 2% discount on my total invoice amount of $10,000. If I choose to pay them within 10 days, then I will pay my supplier 98% of $10,000 for this invoice, which is $9,800. From my perspective, my out of pocket savings is $200, but what is the opportunity cost to me in not taking the discount? How much would it be worth it to me to have that $200 for an additional 20 days, not take the discount, and pay my supplier $10,000 thirty days after I receive the invoice. 

Let’s assume that my opportunity cost of capital is 10%, i.e., it costs me 10% to take the discount relative to my next best use of the $200 cash. So, the value for my company to have $200 for 20 days is $200 X (20/360) X .10 (opportunity cost) = $1.11. So, the present value of taking the discount is $200 – $1.11= 198.89. I would say taking the discount makes sense, not taking it has the cost of the discount opportunity lost is $198.11. It most often makes sense to take a discount offered by a supplier. That means we need visibility into the discounts currently being offered by our suppliers. It can also make sense to negotiate discounts with your suppliers if they value being paid sooner than your current invoice terms. The better your relationships with suppliers the more opportunities you will have to take more control over when you pay them.

The more control your company has over how and when you make supplier payments the better. This does not mean that you should dictate the type and timings of payments to suppliers. Control should be established by Investing in supplier relationships. This entails working with suppliers to determine mutually beneficial payment terms related to payment types and timing. Being a good customer can have a meaningful impact on any company’s bottom line.