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Accounts Payable: A Vehicle to Drive Competitive Advantage

 Nasreen Quibria, Aberdeen Group - 18 Aug 2009

The article examines how improving the accounts payable process can help with optimising cash flow and financial management.

Uncertain economic conditions, coupled with a rapidly changing competitive landscape, have seen many firms face a challenging future. There are two ways for a company to improve profitability: increase sales and reduce expenses. The weak global economy continues to dictate that any improvements in profitability must be driven by improving costs - and the one variable businesses can really control is expenditures.

In response to the current protracted economic downturn, financial executives are refocusing their efforts on the efficiency of their business operations as a source of potential savings. Improving the accounts payable (A/P) process has become an increasingly critical function for optimising cash flow and providing financial management support in an era of tightening credit.

Most A/P departments are deluged with paper. According to the Aberdeen Group, 80% of invoices are still in paper format. Labour costs associated with handling paper are the single major cost component of A/P. This includes the tedious manual process of capturing, submitting, approving and paying vendor invoices. Eliminating paper in this process can cut costs, increase productivity and reduce errors.

Moving Towards Automation
Although paper-based processes continue to dominate the A/P landscape, there is a trend toward automation as ways to cut costs in order to help improve the bottom line. One tool that is gaining traction among large companies is account data capture solutions developed to convert the paper-based documents into data sent to the accounting or enterprise resource planning (ERP) systems. Companies spend significant resources matching invoice data to the original purchase order or contract and acquiring the multiple levels of approval to process an invoice. Large corporations have realised the benefits of utilising account data capture solutions, including increased efficiency in the processing of A/P and accounts receivable (A/R) data in addition to improvements in cash optimisation in terms of reducing days sales outstanding (DSO) and improving days payable outstanding (DPO).

For smaller companies accustomed to using Excel spreadsheets or other less sophisticated software to manage day-to-day operations, faced with set infrastructure costs and rising expenses, additional capital expenditure may not seem practical. Small business owners also have varied responsibilities and may not even have an entire department dedicated to A/P, which may be handled only during a dedicated time period. But continuing to maintain and process paper documents is inefficient and can create liability issues. In these situations it is more economical for small businesses to outsource their A/P process and focus on core business activities. A/P outsourcing solutions focus on optimising transactional processes like scanning, opening and data capture, and an outsourced solution eliminates the need for costly software or hardware purchases plus it frees up existing staff and other potential resources.

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