While effective spend and cash flow management are of utmost importance to most companies today, they are often very challenging to implement. Companies have to manage complex, global supply chains, on and off contract spend, maverick buying and large volumes of invoices. To gain insight across their financial value chain, it’s critical that they have visibility throughout the purchase-to-pay (P2P) process.
The Purchase-to-pay process requires interactions with multiple departments – Finance, Procurement, Accounts Payable and the Treasury, and typically encompasses several core steps: spend analysis, sourcing, contracting, procurement, receiving, invoice processing and transfer for payment. When businesses take a more integrated approach to purchase-to-pay, it can free up working capital, drive more profitable relationships with suppliers and create a more agile finance function.
There are several best practices that can help companies gain greater visibility and control over their purchase-to-pay operations. Following are some strategies companies can implement to further these goals:
- Achieve visibility. Companies can’t control what they can’t see, so visibility across purchase-to-pay should be a key area of focus. With real-time visibility, companies will be able to know what their liabilities are, how much they are spending and with whom, and where they stand in their payment commitments to suppliers. It will also enable them to find opportunities to cut costs, get early payment discounts and make better purchasing and payment decisions.
- Focus on automation. In addition to providing real-time visibility, purchase-to-pay automation is critical in helping companies gain control over their business processes, and enforce their policies in areas such as purchasing and invoice approvals. By establishing easy-to-use electronic catalogs, for example, companies can reduce maverick buying, when employees purchase goods off catalog. Automation also provides significant efficiencies and cost savings.
- Connect with suppliers. Open collaboration with suppliers can strengthen relationships and enable companies to find opportunities to cut costs and better manage spend. An effective way to further buyer-supplier relationships and gain efficiencies is through an automated buyer-supplier network. These networks offer catalog-based purchasing as well as the ability to issue and receive purchase orders, purchase messages, and invoices electronically. This allows purchasing organizations to promote buying from preferred suppliers at contracted prices and also trade with thousands of suppliers globally. Buyers should implement supplier activation programs to make it easy for suppliers to participate in these trading networks. Suppliers can create customer-specific catalogs and post catalogs to the network, improving the service they can offer to buyers, along with increasing their own revenue opportunities.
- Promote collaboration between Procurement and Finance. While procurement and invoice processing are part of the same process—from spend planning to actual spend—they are often separate, siloed operations within an organization. Companies need to have visibility across purchase-to-pay to be able to identify opportunities for supplier consolidation and volume discounts, as well as to effectively manage cash flow and working capital.
- Get executive buy-in. Executive sponsorship will create the impetus to promote purchase-to-pay best practices and implement change. At the highest levels of your organization, make the business case for the cost savings, productivity gains and better visibility and control over finance that improved purchase-to-pay practices provide.
The Basware Purchase-to-Pay Model was developed to describe the different stages companies move through as they improve their procurement and finance operations. This framework identifies many of the best practices companies can implement at each stage to achieve greater P2P excellence:
- The Emerging Company – Many companies begin working toward purchase-to-pay improvement by automating processes. For example, by automating the invoicing process they can reduce the inefficiencies of manual processing, reduce paper and gain greater visibility into their invoices—the actual spend and cash commitments the company has made. Automation enables companies to also improve supplier relationships, and gain greater control over their payment commitments.
- The Aligned Company – At this stage Procurement and Finance become more closely aligned. By working closely together, Finance is able to establish robust compliance procedures that reduce maverick spending by up to 40% and Procurement begins to enable and integrate its supply base via direct goods requisitioning systems, ensuring that purchase-to-pay accountability is enforced at the point of need.
- The Networked Company – The Networked Company has progressed toward implementing a fully integrated model that brings together Finance, Procurement and external suppliers. This approach enables strategic sourcing and management of the full contract lifecycle. Using open networks to connect buyers and sellers of all sizes is a win-win proposition. Procurement benefits from collaboration by having improved supplier relationships, seamless cash flow and an enhanced ability to forecast. Suppliers can reduce costs, obtain greater process visibility and potentially collect payment faster.
- The Agile Company – This company can operate with the greatest financial and organizational agility. It has fully optimized processing costs throughout the purchase-to-pay cycle and has reduced the cash-to-cash flow. It has full cash flow visibility, allowing the company to lower the cost of capital and optimize its working capital positions. Finance and Procurement work collaboratively to implement innovative payment strategies to maximize discounts, while optimizing DPO (days payable outstanding) and DSO (days sales outstanding) performance.
By focusing on continuous improvement throughout the purchase-to-pay process, companies are able to quickly see significant results throughout their organization. While the ultimate goal is fully agile operations that provide maximum visibility, control and collaboration across the financial value chain, both internally and externally—it’s important to put a stake in the ground and start somewhere. Benefits will be realized in all stages of improvement as companies work to achieve stronger supplier relationships, and tightly align Finance with Procurement to work toward common business goals. They will be able to more effectively manage spend, cash flow and working capital—the hallmarks of solid financial operations that create strong competitive advantage.
Bob Cohen is Vice President, North America for Basware, a provider of software solutions that automate the purchase-to-pay process for enterprises around the world. For more information, contact [email protected], or call 203-487-7900.