Working capital management: driving additional value within AP; Treasurers typically face the dilemma of trying to balance early payment discounts with maximizing float from short-term cash. Adding a purchasing card settlement capability within an EIPP program can be a major help.

• Author: Bauer, Dennis
• Position: CASH MANAGEMENT - Accounts payable

Regardless of the economic climate, companies are always seeking new and innovative ways to reduce costs and increase revenues. One approach attracting attention from leading financial executives lately involves maximizing working capital--or extracting more value from short-term cash.

Accounts payable (AP) and procurement professionals often help their organizations realize working capital opportunities by streamlining processes for paying suppliers and securing the best supplier discounts and terms. Treasury professionals typically manage working capital through days payable outstanding (DPO) and by optimizing the use of cash.

Reaching these goals on a consistent basis, however, can be a daunting task as companies are forced to strike a balance between capturing the best early payment discounts and maximizing the "float" from short-term cash. Organizations can now leverage innovative methods to better utilize their working capital while balancing the needs of suppliers, procurement, finance and AP and treasury.

Challenges in Managing Working Capital

Companies striving to improve the way they manage working capital often struggle with paper-based, manual invoicing processes that result in lengthy invoice cycle times, which in turn makes it difficult to qualify for and capture early payment discounts. Because these companies allocate so much time and energy to simply processing invoices, they are unable to devote the resources needed to strategically identify and work with suppliers.

Multiple groups, including treasury, finance, AP and procurement, impact an organization's ability to manage working capital effectively--but often work in silos. While each of these groups has its own goal, the entire organization must be aligned to receive maximum working capital efficiencies.

Treasury, for example, wants to maximize working capital and optimize the use of cash by managing days payable outstanding and capturing negotiated discounts. AP professionals seek to streamline payments, gain processing efficiencies and increase controls and compliance. The procurement department is interested in maintaining good supplier relationships, rationalizing the supply base and negotiating better contract terms.

While these goals may be similar, they are not perfectly aligned. A few--such as managing DPO and paying suppliers early to capture discounts--must be carefully balanced if an organization is to make optimal working capital decisions.

Many companies...