Accounts payable is the event that pays for the liability incurred by the purchasing process, which is for supplier purchases or inventory required by manufacturing to meet customer demand. Sales generates the demand that created the accounts receivables, which is turned into cash. How do you write accounts payable procedure, a part of the purchasing policies and procedures manual, to disburse the cash?
Your accounts payable procedures are a bit different then the other accounting processes. Those represented processes where the focus was on reducing the size of assets (inventory or accounts receivable procedure) or expenses (marketing) and increasing the velocity or cycle time. In accounts payable, our focus is on increasing the size of assets while maintaining a solid credit rating and increasing the process velocity.
Now, let’s look at how to find $250,000 in accounts payable savings. If your organization has $500,000 in accounts payable each month…STOP! We can find $250,000 in savings right here! “Where?”, you ask. Increasing payables velocity by 25% will produce $125,000 in cash plus $125,000 from automating tasks, taking more discounts, and managing the process better.
An organization with $600,000 in monthly payables needed assistance. We examined their payables process to understand and quantify workflow, paper processing, and credit issues, then designed and implemented a process to increase their use of payables and discounts, improve their payables cycle efficiency, and tie it to their purchasing and receivable cycles. We then reinvested $50,000 back into an Enterprise Resource Planning (ERP) program to automate some of the processes that weren’t automated already.
The purchasing metrics we developed reduced their purchasing and payables expenses by 25% and increased their efficiency from 50% to 75% within 2 months of implementing the new procedures. With these new processes and reports, the company now tracks payables cycle efficiency and average days payables, rather than just bills paid on time or outstanding balance as the measure of their payables effectiveness. The result: an extra $300,000 in cash, plus a 50% increase in process capability (capacity).
Accounts payable procedures are critical to the cash disbursement process and focus on increasing the size of assets, while maintaining a solid credit rating, and maintaining solid cash flow. Time is the key. All you have to do is own it.