Supplier Enablement

Accounts Payable - profit or cost centre?

According to an article in Line 56.com it is potentially a profit centre that by taking advantage of early payment discounts can generate annualised risk free returns of 36%. See footnote for explanation.

Interested?

To get these returns you have to be able to capture the early payment discounts and there is the rub because if you are processing paper invoices you probably will not have the reaction time to get a hold of these discounts. Sorry for raising your hopes!

Next question then is what do you need to capture these early payment discounts?

Assuming you have suppliers that are willing to offer discounts then their terms will be negotiable according to their appetite for cash but let's say in the range 3 - 10 days are usual for discounts of 2 - 4%.

What would you have to do today to get visibility to those invoices from those suppliers that were prepared to offer discounts?

To cut to the chase; paper invoices are a problem to a process that is dependant on getting visibility to those invoices and reacting to them to take discounts. Replacing paper invoices with electronic invoices with a supporting process gives you control.

Of course then we need our suppliers to present electronic invoices and that is easy, right? Now we are at the heart of the conversation that is taking place today because we have the technology and the business case is now shaping up so what's stopping you?

Quick test of what might be available to you, not as class leader but doing a reasonable job of capturing early payment discounts:

You make supplier payments of £100M p.a
£15M p.a of supplier payments are available with discounts
Let's say that the average discount is 2%, that is £300,000
Let's say you capture 60% of those discounts, that is £180,000 in cash

Let's say your business earns a gross profit margin of 10% on sales. You've just delivered £180,000 to the bottom line risk free and that is equivalent to £1.8M in sales.

Easy to shrug this off as something you'll get round to tomorrow but can you afford to put it off?

Click here for more about how you get started with electronic invoicing.

Click here for the full article published by Line56.com

Footnote: here I show the calculation for an annualised return of 36%.

You have an invoice to pay £1000 within 30 days.

The supplier has offered a 2% discount if you pay within 10 days. 2%/10 net 30.

You decide to take the discount and pay £980 (£1000 - 2%) within 10 days.

The £20 saved on the invoice price when expressed as interest earned on £1000 calculates an annualised return of 36%.

posted by FrankB @ Friday, August 18, 2006