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AP Automation and the Time Value of Money

January 29, 2019

When it comes to accounts payable, companies are rarely in the business of optimizing processes so that they can get money out the door more quickly and pay vendors ahead of time. All too often, companies struggle enough with manual approval and payment processes to stay on top of the flow of vendor invoices into their organization to think seriously about the cost savings associated with early payment discounts many vendors offer and they fail to consider the time value of money in the context of accounts payable.

That’s a real missed opportunity on a number of fronts. Because companies that successfully automate and streamline their AP processes are able to go beyond looking at their department and their roles as a cost center. They can begin to see the big picture and understand how their jobs contribute to the financial wellness and performance of their organizations.

In that context, AP automation does more than reduce the time/cost/effort of paying vendors for goods or services rendered. It leads to more timely access to data, like g/l accruals, that provide better overall visibility to cash flow. In that sense, your AP team can contribute to your firm’s financial wellness by helping to better manage and maintain the company’s financial life line—the influx and outflow of cash.

Once THAT goal has been achieved with some measure of predictability, you now have the ability to look at your vendor contracts and identify opportunities for further cost savings by looking for opportunities to cut costs through early pay discounts, a policy and practice that is as old as commerce itself, but that has new relevance in a world of automation and process control.

Beyond incremental cost savings, when looked at in the context of the time value of money, early pay discounts really have an impact. The core principle in play is that money available today is worth more than the same amount in the future. That’s because the potential to earn interest on those dollars, or to reinvest them in growth or optimization can continue to pay dividends.

Early payment discounts, while commonly offered among vendors, are not as commonly taken advantage of by companies, largely due to their lack of internal process efficiency and insight. In fact, according to research from Ardent Partners, less than one fifth (19%) of early payment discounts are captured.

While paper-based processes and inefficient manual document handling/data entry used to be an excuse for failing to process invoices quickly enough to even consider early payment discounts, those days are gone. Automated vendor invoice solutions like Artyl’s InvoiceAction, connected to ERP and ECM systems, can be implemented within 90 days and deliver an ROI just from process efficiency (not including early pay discounts) in 180 days on average.

With AP automation in place, companies can optimize and balance cash flow and early pay discounts to achieve the best of both worlds. When applied correctly, these discounts deliver a win for suppliers and their customers. Suppliers that get paid sooner can put money back to work for their organizations. Buyers achieve a more positive rate of return on their own working capital by paying early.

Embracing the concept of the ‘Time Value of Money’ from an accounts payable perspective, is another way for AP to elevate itself from the traditional stereotype as a cost center to a value-added, strategic asset within the organization.

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