The eighth profit driver is Accounts Payable (AP). The AP function plays an important role in managing the cash flow cycles of the organization. The objective of most performance improvement projects is to increase the speed of a process in some way. That’s generally not true for this particular area since it might be counter-productive to pay your invoices faster than you need to. In fact the objective of a project in this area might be to slow down the process. So finding opportunity in this area requires a slightly different mindset. Here are a number of things to consider in this area:
- What are the payment terms for suppliers? How do they vary?
- Are invoices paid on time?
- How are supplier and vendor relationships? If poor, how does this affect operations?
- Are there any discounts made available for quicker payment? Is this captured?
Understanding the detail of the payment terms and the affect on supplier relationships is important for understanding how the department needs to be managed. Understanding the actual AP process can also yield opportunities. AP departments can have a number of recurring operating problems that can result in carrying excess labor. Some of these might include:
- Ineffective use of technology
- Inconsistent or unclear decision authority (e.g. partial payments)
- Supplier errors
- Workload imbalances
So although it might seem that the AP process is not a priority for performance improvement, it plays a key role in allowing the organization to manage it’s all-important cash requirements. Its relative importance also increases significantly whenever the economy slows down and managers are forcefully reminded why cash is king.
