Optimising Accounts Payable to Ride Out a Recession
With two quarters of negative economic growth (as of February 2008), recession rumours continue to circulate. Whether or not a full-blown recession comes to fruition, organisations across all US industries are subscribing to the adage, a pound of prevention is worth a ton of cure, and are moving quickly to put together ‘recession proof’ strategies. To this end, a natural focus, of course, is the finance function. After all, this is where the cash flows in and out of the company.
As a finance executive, you play a pivotal role in the survival or demise of your company. In a market like today, cash is king and as the gatekeeper to that cash, prudence will be a virtue worth its weight in gold.
When developing cash flow strategies, the first area that typically comes to mind is the accounts receivable function – the key goal being optimal days sales outstanding (DSO). For obvious reasons, DSO should never be taken lightly and there is a plethora of ways to drive down DSO. Any seasoned finance executive can likely spew a laundry list of strategies they deploy to optimise DSO.
But what about the other side of the ‘cash flow coin’? What about cash that goes out the door, otherwise known as the accounts payable (A/P) function? Often overlooked, A/P plays an equally critical role is the cash flow game. What good is getting in the cash faster, if the outflow is not optimised?
On the surface, the A/P function appears to be straightforward, but it is more than just paying the bills. It is also about cost and quality control, and vendor relationship management. In addition, if controlling costs, without degrading the quality of the product or service delivered is the goal – two seemingly conflicting goals – then the complexity of the A/P process begins to become even more apparent. Add to the mix the sheer volume often handled and it is clear that A/P is not just about paying bills.
Let’s take a look at a real-world case study of a medium-sized restaurant chain with the goal of controlling costs, without degrading the quality cuisine – again, two seemingly conflicting goals. In addition, the company wanted to align actual and theoretical costs, which would for example, enable them to know exactly how many pounds and dollars of filet mignon or potatoes are in a menu item. So one of the first areas they looked at was the A/P function. The executive team knew that if they could lower food costs, without affecting the quality, they would not only increase shareholder value, but also help the company more effectively manage its cash and streamline accounting processes.
At that time, the company had three full-time A/P staff in the corporate office and book-keepers at each individual restaurant managing 75,000 line items a month and 4,200 vendors.
Beyond the data consistency issues, invoices were being paid multiple times and tracking invoice status was a cumbersome, if not impossible task. In addition, the company was light years away from its ultimate goal of aligning actual and theoretical costs.
The bottom line for this company is that the A/P process was quite complex and finding the right internal employees to handle the job was a continual battle.
Insourcing the A/P function is clearly a viable choice for some companies. Having an internal team means that they conceivably know your business inside and out, not just the functional aspects of their job.
On the flip side, the benefits of outsourcing are obvious: lower costs, SAS70 Type II controls, focused expertise and access to the latest technology. And because outsourced solutions are driven by automation, business rules and best practice processes, they yield higher quality. For example, the average in-house A/P department has a 2% error rate versus a high-quality outsourced provide with a 0.03% error rate. Additionally, companies are outsourcing individual finance and accounting processes, such as accounts payable and payroll, rather than outsourcing the entire accounting function. As the use of outsourcing has matured, companies have realised that outsourcing individual processes can achieve rapid and significant results with minimal risk.
For the restaurant chain mentioned above, they tried to build an internal A/P team, with sub-optimal results so decided to look to outsourcing to help support the company’s growth goals. Initially, the goal was to outsource only the payroll function to get their ‘feet wet’, however, when they were able to find a vendor that offered a complete accounts payable solution that included both payroll processing, invoice payment and tracking, and a solution to manage costs, this company jumped in with both feet and realised benefits such as:
Given the benefits, it is not surprising that many experts are calling outsourcing a recession-proof tool. “The expectation is that outsourcing in the financial services industry will grow as buyers seek to reduce operating costs, avoid investments into new systems and capabilities, shift focus to more strategic activities, and leverage their growing supply of skilled global resources,” said Stan Lepeak, EquaTerra’s managing director of research. “This trend in financial services illustrates that outsourcing as an industry has become ‘recession-proof’ and that outsourcing is a tool buyers use in up markets to improve performance and in down markets to reduce costs and remain competitive.”
IDC Research predicts that the outsourcing of the finance and accounting function in particular will increase. According to their recent research, IDC estimates that US spending on F&A BPO services amounted to US$9.4bn in 2006 and expects this market to grow to US$19.4bn by 2011, a five-year CAGR of 15.6%1.
Beyond predictions, the bottom line is that companies are using outsourcing to get real results. The example restaurant chain above was able to implement a new accounts payable process and web-based technology across the entire chain in less than six months – all while the company was experiencing a 20-25% year over year growth rate by going with an outsourced model.
Additionally, best practices were developed to ensure that retrieval of data is just a click away. Invoices are all faxed and automatically scanned into the system eliminating the company’s rooms upon rooms of physical files. In addition, the new A/P function was Sarbanes-Oxley compliant, significantly reducing the time and costs associated with managing this government mandate.
“Now, if a vendor calls up and says they have not been paid, we can give immediate status on the invoice. Our new system enables us to protect our valuable supplier relationships, manage cash flow and remain compliant – feats simply impossible with our previous in-house approach,” said the CEO of restaurant chain.
Once the company’s payroll and invoice payment processing was in tip-top shape, the next step was to align actual and theoretical costs, a critical step to getting the company ahead of the game, rather than just play catch up.
“At the end of the day, knowledge is power, and if understanding your business and the data behind it is not your priority, you are not a growing company,” added the CEO.
Using outsourcing, the restaurant chain was not only able to become more efficient, but also be more effective. With 75,000 line items monthly and 4,200 vendors entered into the system, each individual restaurant now has access to detailed data that helps them lower foods costs, without affecting quality. The company can now quickly determine the root cause of inefficiencies – whether incorrect portions, over ordering or some other internal issue. The end result is higher margins, without quality degradation.
During tough economic times, the companies best prepared are the ones that will come out on top. Accounts receivables and payables go hand in hand, and to optimise one, without the other is akin to a coin with only one side. If you don’t already have a stellar A/R process in place, outsourcing of the A/P function is a viable option to quickly get your cash flow process in top shape. Savvy finance executives know – and the ones that will have the best chance of riding out a recession – that the game is to get the cash in quickly and hold the outgoing cash as long as you can. It is a delicate balance for sure and one that requires both a holistic approach and extensive expertise.
1Source: IDC, Worldwide and US Business Process Outsourcing 2007-2011 Forecast: Market Opportunities by Horizontal Business Process, Doc # 208290, September 2007.