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Accounting

Creating a Vision for Accounts Payable: The Strategic Business Within a Business


by Daniel Saraste

How to align AP operations with the CFO agenda of improving profits by shifting the mindset of AP as value center versus cost center.

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In a world of near endless advancements in enterprise technology and automation, the accounts payable (AP) department can sometimes be an afterthought. However, the need for a clear strategic vision and mission for AP has never been more evident than in today’s post-COVID era. Savvy finance execs can take this opportunity to transform AP into what they always wanted it to be.

AP management leaders are told to cut costs which typically translates to reducing headcount. But focusing on headcount reduction alone might be a too narrow view in the bigger business picture.

I’d like to make the case that the means to achieve actual improvements is through changing how AP is viewed in the organization as well as within the accounting department. A good starting point is to think of the AP department as a stand-alone business that needs its own vision and mission in support of the larger organization to showcase its unique value.

Establishing a Strategic Vision and Mission for AP

This strategic vision and mission for AP needs to come from the top down. It’s important to ensure AP isn’t overlooked as a value center. Start by thinking in terms of why a CFO would invest in AP; AP leadership has the responsibility of protecting the company’s cash and providing timely and accurate financial data to the financial statements. Those are the first and foremost responsibilities of AP leadership, and the importance of these activities should be emphasized to corporate finance leaders and the CFO.

The AP leader needs to account for every part of their “business,” marking what their value to the organization is and how they provide that value. How much time does it take for AP to deliver their “goods” to the business? What are the bottlenecks or cracks in the system that slow down the process?

Next, it’s important to establish a mission for the AP team. This requires a focusing on cash versus debt. Centering efforts for improvements that enable the organization to gain more value from the AP function, not on headcount or invoices. This mission redirects the AP team away from focusing on the reactive “back office” way of the past, to focusing on improving the value AP can deliver to the business. That mission may look something like the following:

“To build a cohesive relationship with procurement and suppliers to develop a compliant purchasing and payment strategy for goods and services to meet the needs of the organization while making a positive impact to the bottom line and protecting the cash, supporting cash management and reporting accurate, timely data to the financial statements.”

From there, it’s important to think about what the CFO’s agenda includes – which revolves around profit – and align the AP department’s vision. After all, profit is likely the driving force behind the initial push to reduce AP’s headcount. But this knee-jerk reaction is a common and short-sighted mistake. Reducing headcount is a one-time benefit that pales in comparison to the profits obtained through elevating AP’s mission. Tangible, and repeatable benefits such as reaping discount opportunities, improved spend management and budget control, card rebates, cost avoidance on penalties and fines, are among the countless other benefits that come from an efficient AP process.

The COVID-19 Effect

Many companies are responding to today’s chaotic COVID-19 business landscape by attempting to grow their cash reserves. However, if there is a sole focus on external financing, companies may be overlooking a large, hidden source of capital that exists in their own balance sheets. After all, raising financing can take as long as six months and requires significant effort from both the CEO and CFO. AP can provide the means to fuel alternate working capital management strategies (such as capturing early pay discounts) that can produce faster returns without increasing the company’s risk profile.

Most organizations have numerous options for freeing up net working capital, including leveraging AP automation. Today’s AP automation solutions can also provide pertinent data in real time, including competitor benchmarks, to help organizations track their performance and navigate effectively in the “new normal/not business as usual” environment. With millions of transactions running through them, they can aggregate statistics on process performance and financial data that provides critical benchmarks to enables organizations to execute in an informed manner.

AP automation also hardens systems against post-COVID era fraud. During the pandemic, a host of new suppliers and new orders flooded AP departments while also unwittingly subjecting them to greater fraud risk. AP automation can assist with fraud mitigation by helping flag duplicate invoices while assisting with reconciliation by acknowledging inventory receipts via three-way matching. Moving forward, it will be important for companies to have consistent controls enforced by AP automation such as multi-factor authentication, which requires users to verify their identities with at least two types of credentials.

Finance Departments Sharpen Focus for Today and Beyond

While cost reduction remains at the top of the agenda given the economic slowdown, finance must also support enterprise growth strategies by expanding its role as a strategic business advisor.

Many organizations struggle with the business case for making investments in AP automation. The road to success begins with shifting the perception of the role of AP, both internally within the department and externally with other areas of the business, and this begins by setting the agenda and clearly communicating it via the mission. By bolstering AP’s value to the organization and making it clear that its role is instrumental to the bottom line, AP leaders can transcend to a new era where they are empowered to create a positive return on investment. What’s more, they can build a coalition where the organization can now support the enterprise growth strategies through process efficiencies, and more importantly, by driving improved revenues and cash flow.

Daniel Saraste is Senior Vice President of Strategy and Innovation at cloud-based source-to-pay vendor Medius.