Cash advance: pay early and save

This article is brought to you by Retail Technology Review: Cash advance: pay early and save.

How intelligent matching helps you gain control of your payment cycle, saves money by capturing early settlement discounts and strengthens relationships with suppliers, by Jamie Taylor of Basware.

If you could save 25,000 on a payment run of 1M, while improving relationships with your suppliers, and also cutting invoice processing costs, youd probably ask one, simple question:  How?  Especially in the current, lean business climate, where the pressure is on to save wherever possible.

The answer is to look at the speed at which businesses pay their suppliers.  At the start of 2008, Experian found that on average, UK businesses are taking 61 days to pay their bills, an increase of 2 days over the previous year.  The reasons behind this may vary.  But in any case, late payments mean businesses can invest further in activities that support their own needs such as promotions or can simply get more interest. 

But while everyones doing this, it isnt good for supplier relationships.  Nor does it always make the best financial sense, as suppliers increasingly offer early settlement discounts, to incentivise quick payments.

Quick payment matters
While paying suppliers early to improve your own cashflow seems counter-intuitive, the figures do add up.  A typical business reserve account gives around 5% interest, or 0.4% per month. 

However, a supplier will typically offer a 1.5% to 5% discount for settlement within 15 days.  Lets assume a company negotiates an average discount across its suppliers of 2.5%.  Thats six times what it would earn in interest by delaying payments. 

On a monthly payment run of 1M, this company would earn at most 4,100 in interest, but save 25,000 per month through early settlement.  Whats more, it improves cashflow for suppliers, making it a true win-win.

However, the problem is in many cases, companies accounts payable systems arent up to the task of hitting early settlement deadlines, even though many have deployed automation solutions to help them realise efficiencies and savings.  Why is this?  And how can this be improved?

Match and mis-match
The issue is this.  In many cases, companies AP automation solutions focus on the front end that is, on the scanning and capture of invoice data, and uploading onto the accounting system. 

But the most vital stage is what happens after the invoice is digitised the matching of the invoice to its corresponding PO and supporting documents, so it can be approved and passed for payment.

Matching is the most time-consuming phase of the process, as manual tasks like finding purchase orders and good received notes; checking and consolidating; and manual entry into business systems eats man-hours that could be better used elsewhere. 

If these matching-related tasks can be automated, then settlement deadlines can be hit, and accounting staff can be more strategic roles instead of chasing paper.  So how is this done? 

Better matching
The key is to integrate the captured invoice data with approved supplier details and approved purchase order information.  This demands links with core business systems so that any exceptions (such as invoices without orders) can be highlighted, and escalated to the workflow of authorised staff. 

This way, invoices that match the defined criteria are automatically released for approval and payment, minimising the need for manual intervention and action.  This workflow can be governed by customised, business-specific rules, enabling AP staff to manage invoice processing by exception so that only non-matching invoices require hands-on attention for approval. 

This also means that key targets like settlement deadlines can be built into workflow, so they can be hit every time to capture those important savings.  Who would have thought that paying forward could have such a good payback?