Accounts payable: Payment efficiency can enhance supplier relations
The accounts payable process can affect a company’s profitability in a number of ways – one of the more important is how it can influence the company’s relationship with its suppliers.
When identifying and contracting a vendor as part of the procurement process, many buyers fail to recognise the opportunity to build strategic business partnerships. Procurement is seen as an irritating negotiation process devoted to cutting costs rather than creating value. However good, procurement processes are not merely about cost-cutting; they also enable an efficient supply chain and better overall business performance. Best business practices within procurement are vital to achieving this because purchasing departments need to work collaboratively to create valuable relationships with their suppliers (rather than limiting their interaction to haggling). By treating suppliers as partners, businesses can enable better cashflow management and open up the door to new business opportunities as well as potential clients.
How do suppliers impact your company?
There are a number of ways in which a supplier can impact your business:
1. Keeping costs down
Let’s face facts – every business strives to maintain a balance between delivering a consistent level of quality and cutting cost, making the wholesale purchase price an integral piece of the supply chain puzzle. Customer satisfaction is dictated by the quality of your product which in turn is determined by the quality of the supplier component. Increased customer satisfaction and a decrease in returned inventory levels can quickly add cash to your bottom line, so quality is essential for real cost-saving.
2. Keeping standards up
Regardless of whether a business is buying goods or services, the procurement process has to achieve the right balance between quality and cost in order to produce the most efficient outcome. Britain’s banks learned this the hard way when they first started outsourcing business processes to low-cost locations, spurring a huge customer backlash due to poor quality service.
3. Playing by the rules
Ethics is another major consideration for modern procurement processes. A supplier’s approach to industrial relations and the environment become factors in the buying decision because ethical breaches by suppliers can impact the reputation of the purchaser. Historically major clothing retailers such as Nike and Gap have suffered damage to their brands due to poor working conditions amongst their suppliers, and more recently the garment industry has been hit by accusations regarding environmental pollution by suppliers. The major apparel businesses have acknowledged that cheap goods can involve a hidden reputational cost, and supply chain management policies tend to stipulate minimum working conditions and environmental standards on the part of suppliers.
4. Staying in front of the pack
An adversarial approach to suppliers results in a repeating zero-sum game, with the purchaser and the seller losing sight of shared opportunities for growth and improvement. It’s important to remember that suppliers can offer useful insights on industry trends and allow you to stay one step ahead of the competition. A good supplier can be an ally in the drive to become more competitive not only because they help to improve quality and tackle inefficiency, but also because they can provide insights from their industry as well as a relevant input for innovation. However, these benefits can only be derived from active engagement with suppliers, and an acknowledgement that productivity is just as important as cost.
The late payment fallacy
If you can pay late, you should pay late… right? Wrong. Late payment can enhance cash flow, but it can also do terrible damage to supplier relationships. Smart businesses pay promptly in accordance with appropriate payment terms rather than applying blanket late payment policies. By discussing payment terms up-front with your suppliers, these businesses open the door to other opportunities including better access to additional financing from suppliers (in the form of extended terms on new purchases) and early payment discounts that can also improve the buyer’s cash position.
A recent study from the 5th annual North American Automotive – Tier 1 Supplier Working Relations Index revealed that Ford, General Motors, FCA US (formerly Chrysler) and Nissan collectively would have earned $2 billion more in operating profit in 2014 had their supplier relations improved as much as Toyota’s and Honda’s did during the same period. FCA US was revealed to be the worst culprit for late payment in the study. Commenting on the findings, John Henke author of the study said:
“OEM buyers and management have to remember those cost reductions, contract changes, and other similar programs do not of themselves result in poor supplier relations; it’s the manner in which these programs are administered that causes poor relations with suppliers.”
Good supplier relations need to be an area of focus for business and should be considered at each stage of the procure-to-pay cycle, from the purchasing department through to accounts payable. Too often value is lost in this process and key supplier relationships are damaged to the buyer’s cost.
Late payment by default or by design?
Many suppliers find that their customers are paying late due to administrative problems rather than late payment policies. These businesses frequently pay on the first invoice as well as the reminder, causing administration problems on both sides when the double-payment problem needs to be resolved. In these businesses the accounts payable process is not robust, invoices stack up and supplier calls for payment become more and more irate. Businesses that are paying late due to inadequate processes are also likely to have a poor grasp of their financial position, so suppliers are right to factor late payment into their assessment of a customer’s creditworthiness.
By properly managing the lifecycle of supplier invoices without error or lost documentation, accounts payable teams can actively contribute to better overall client-supplier relations, vital to the overall financial health of any company.
“The cheque’s in the post”
Any cashflow benefits derived from the use of cheques are heavily outweighed by the overall costs of cheque processing and cheque fraud. For this reason, banks and governments are actively working to phase out cheque payments around the globe.
Electronic payment is not only cheaper than cheques, but it also enhances the precision and accuracy of supplier payments. Precise scheduling of payment adds greater transparency for buyers to know exactly when the supplier is paid, and electronic payment tools can trigger automatic payment advice for the supplier once payment has been processed. Automatic payee validation tools guarantee accurate payment details, ensuring first-time delivery success rates for more than 90% of electronic payments. This is in stark contrast with cheque payment, where lost mail and mislaid cheques frequently lead to cancellations and re-issues.
Paper, paper everywhere
“60% of all invoices arrive as paper, and almost all of your payments to your suppliers are paper cheques”. Sound familiar? You’re not alone.
Many companies struggle with disconnected, manual, and paper-based payment and cash management processes that also consume a great deal of time and resources. Few can argue that paper-bound workflows are hard to track, using up time and valuable resources that are better spent elsewhere. They also increase the risk of errors and make it difficult to reconcile accounts reliably, inevitably impacting the client-supplier relationship. Using cheques to pay suppliers unnecessarily lengthens the payments cycle further with longer clearing times that are less than favourable for many vendors.
Many businesses discover how important supplier relationships can be when they embark on a transformation of their accounts payable functions. Supplier engagement is essential to successful e-invoicing projects and procurement initiatives (as many accounts payable functions have learned to their cost). Suppliers need to see that the proposed process changes will benefit them as well as the buyer, otherwise, they will be slow to participate. If you want to move from 40% e-invoicing to 100% e-invoicing, the remaining suppliers who are clinging to paper invoicing need to see that they will benefit from engaging with the change. In some cases, the engagement problem can be solved by replacing non-compliant suppliers with alternatives, but most suppliers are too valuable to be discarded. These key suppliers need to be incentivised with the promise of faster payment, longer contracts or larger orders in order to secure their participation. Needless to say, it’s much easier to have this kind of negotiation if you have a good supplier relationship from the outset!
Tips for managing supplier payments
Without a doubt, gaining better control of the payment process can positively impact the overall financial health of any business and enhance the buyer-supplier relationship:
1. Be efficient, not cheap
Businesses should aim to create efficient procurement processes (rather than cheap payment processes). This involves targeting speed, security and accuracy in administration, as well as maximising value in the supplier relationship. Smart procurement policies will balance the benefit of late payment with other benefits (both strategic and financial) and enable a more valuable relationship between the business and its suppliers. Create a policy on supplier payments that allows your business to extract more value from supplier relationships: in particular, it’s important to identify the relative value that your supplier places on prompt payment and use this as a negotiation tool.
2. State your priorities
Businesses that communicate openly with their suppliers create partnerships and save themselves a great deal of trouble in the long run. If credit is a major issue for your business, communicate this to your suppliers upfront. Likewise, if quality and ethical considerations are important for your product, it’s essential to communicate this in your approach to procurement.
3. Use the right tools
Businesses ignore procurement and account payable at their peril. Modern tools for procurement, e-invoicing and accounts payable have the power to transform the procurement process and save a considerable amount of money. This area is continuing to grow and evolve, so a review of procure-to-pay functions should form part of the annual agenda for all finance functions.
4. Treat your suppliers as partners
Rapid change is now the norm in commercial life, as modern technology enables more innovation and competition than ever before. In this environment, suppliers should be viewed as partners in change rather than adversaries. Good suppliers can be a vital link to the market as well as a source of valuable insights and ideas. By engaging with key suppliers businesses can also identify relevant areas of shared interest. Too often procurement places customers and suppliers in an adversarial role, but an efficient and well-thought-out approach to this area will transform the relationship and create real efficiency.
Fexco International Payments develops solutions for domestic and cross-border payment processing, allowing our clients to concentrate on their core business. Our team of technology, treasury, payment and customer service professionals can adapt and customise business processes, interfaces, reports and other outputs tailored to each client, helping them to make payments effectively, securely and quickly. To find out more about our procure-to-pay philosophy, contact us today.