© 2012 Financial Operations Networks LLC

The Impact of the Procure-to-Pay Process on Working Capital

About Your Presenter

• • Chris Doxey, CAPP, CCSA, CICA Consultant, Internal Controls and Business Process Best Practices Chris has held senior finance, internal controls, and controller positions at Digital Equipment Corporation, Compaq Computer Corporation, and Hewlett Packard. As a result of her background in internal controls, she was recruited to implement the SOX 404 requirements at MCI (Formally WorldCom). She was the Vice President of Account Management at APEX Analytix and currently holds the position of Vice President of Business Development at Business Strategy, Inc. Besides internal controls, Chris has an extensive background in accounts payable, procurement, payroll, logistics, project management, and financial process and system integration. She holds a B.A. in English, a B.S. in Accounting, an M.B.A., and a Graduate Certificate in Project Management. She is a Certified Accounts Payable Professional (CAPP) and holds a Certification in Controls Self-Assessment (CCSA) and is a Certified Internal Controls Auditor (CICA). She has been a member of the International Accounts Payable Professional (IAPP) organization for 10 years and is chairperson of the Education Committee, president of the DC, MD, and NOVA Chapter, and is a member of the Strategic Advisory Council. She writes an internal controls column in the AP Matters magazine, is a regular contributor to the White Collar Crime Fighter Newsletter, and New Perspectives published by the Institute of Healthcare Internal Auditors (AHIA). She is also a member of the IIA, IHIA, ISM, and ACFE. Chris is a sought-after speaker and thought leader. She has published two handbooks, "Implementing a Controls Self Assessment (CSA) Program in your AP Department" and "Accounts Payable Leadership Skills."

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Agenda

• • • • • • •

Definition of Working Capital The Procure to Pay Process Areas Where the Procure-to-Pay Process Can Impact Working Capital

• Cash Conversion • Supplier Management and Strategic Sourcing

Spotlight on Strategic Sourcing Six Ways to Stretch Your Payment Terms Summary Discussion and Questions

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The Procure to Pay Process

Supply Chain Components Process Development Data Acquisition

Procurement

Production

Receiving

Production Capacity Management Outbound Logistics

Accounts Payable

Channel Customers P2P Components The Need For Goods or Services is Identified

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Proposal

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RFI

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RFP

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Contract

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Terms and Conditions

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Purchase Order

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Vendor Master Set-Up

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Obtain W9

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TIN Matching

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Goods Receipts

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ERS

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Invoices

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Electronic Invoices

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EIPP

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EDI

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Recurring Payments ERS System

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AP Sub Ledger

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Clearing Accounts

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Cash Management

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Disbursements

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EIPP

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P-Cards

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Checks

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ACH

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Vendors

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Shared Service Customers

Enterprise Planning System (ERP) – Integrated System and Internal Controls Collaboration and Business Partnerships

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Definition of Working Capital

• A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

Working Capital = Current Assets – Current Liabilities

Positive working capital means that the company is able to pay off its short-term liabilities.

• Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

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Areas Where P2P Can Impact Working Capital

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Cash Conversion Cycle

Days Payable Outstanding Discounts P-Card Settlement Putting It All Together - Electronic Invoice Payment and Presentation (EIPP) • • •

Supplier Management and Strategic Sourcing

Supplier Partnership Management Strategic Sourcing

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Cash Conversion Cycle: DPO

•

Days Payable (A Company’s Average Payable Period) Outstanding =

Accounts Payable ----------------------------- Cost of Sales X Number of Days A company’s total accounts payable was 10,430 (number in millions) and the cost of sales was 47,433.

So to calculate the days payables outstanding we would take (10,430/47,433) x 365 = 80.25. This means that it takes the company roughly 80 days to pay back its creditors.

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6 Ways to Stretch Your Payment Terms

1. Let AP Business Process Owners Drive AP Process Improvements

• • Use the expertise of the SME

2. CFOs or CPOs Should Sponsor the Effort

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3. Build a Strong Alliance Between Finance and Purchasing 4. Approach Vendors Differently 5. Start the Bargaining from a Rigorous Baseline

• Establish a Business Case Owner 1. Untouchables 2. Squeaky Wheels 3. Good Soldiers 4. Wallflowers Don’t only focus on price • Consider delivery costs, supplier discounts, and allowances

6. Pay for Performance

Reference: David M. Katz, Six Ways to Stretch Your Payments Terms, CFO.com July 14, 2011

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Cash Conversion Cycle: Discounts

Effective Annual Rate of Return

Discount X ------------------- Total Period 100% - Discount Days Saved -------------------

For a 2% 10 Net 30 Term (2% Discount If Paid Within 30 Days)

296 ----------------- (100% X 296) X 365 = 37.2% -------------- (30 – 10)

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Cash Conversion Cycle: Discount-Related Metrics

• • • • • • • • • • • • AP Discount Taken Count AP Discount Lost Count AP Discount Date Cash Outflow AP Discount Offered Count AP Discount Offered Invoice Count AP Days from Discount Date (Open Invoices) AP Unrealized Discount Lost Amount AP Unrealized Discount Lost Count AP Discounts Offered Amount % of Invoice Amount AP Discounts Offered Count % of Invoice Count AP Discount Taken Amount % of Payment Amount AP Discounts Taken on Invoice % of Discounts Offered on Invoices

Cash Conversion Cycle: P-Card Settlement = Rebates

P-card settlement solutions typically integrate into an organization's accounting or ERP system at the end of the procure-to-pay process. The organization will create a purchase order and route and approve invoices using their existing workflow and/or ERP systems. After the invoice is approved, rather than cutting a check or initiating an ACH, the buyer sends an electronic payment file instructing their bank to initiate a p-card transaction.

Unlike a traditional p-card or ghost card program, the supplier does not have access to the buyer's card number. Suppliers are not "swiping" their buyer's cards. Instead, the buyer's bank deposits the funds directly into the supplier's account, along with details listing how the payment should be applied. Buyers receive a statement from their bank at the end of the month and can settle all invoices paid via p-card at once.

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Reference: The Accounts Payable Network – P-Cards Turn AP into a Profit Center http://www.theaccountspayablenetwork.com/html/modules.php?

name=Articles&file=article&sid=834

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Cash Conversion: EIPP

Electronic Invoice Presentment and Payment, a B2B system of issuing invoices to customers via the Internet and receiving payment on the invoices electronically.

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The Benefits of EIPP

• Electronic Invoice Presentation and Payment (EIPP) allows companies to process invoices from suppliers electronically and handle electronic payments on the back end. There is no longer a struggle with manual, paper-based payment processing. • EIPP also captures full invoice details, providing additional controls over both non-purchase order (PO) and PO-based spending.

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The Benefits of EIPP

• Within the EIPP framework, some companies are using dynamic discounting as an option for managing working capital. • Most companies will have negotiated and clearly defined early payment discounts with their top strategic suppliers.

• However, dynamic discounting refers to the practice of buyers working with suppliers to capture discounts on a sliding scale when no early-payment terms exist or when the payment falls out of pre-negotiated terms.

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The Benefits of EIPP

• A better approach involves adding a purchasing card program as an alternative settlement vehicle within an EIPP framework. • This strategy offers companies a unique opportunity to maximize returns, align departmental objectives and better control working capital without dedicating additional short term cash to pay suppliers.

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The Benefits of EIPP Reducing invoice approval times through EIPP allows a company to segment suppliers into two categories:

1. Those that have early payment terms should be paid via ACH within the discount window to capture the high return that this provides. Again, this will typically involve a specific number of strategic suppliers so Treasury knows how much cash will be utilized against the company.

2. Suppliers that do not have early-payment terms (typically the majority of the supplier population) can be offered the option to accelerate their cash collection by accepting a purchasing card as settlement on approximately Day 10 in a net-30 environment.

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Supplier Management and Strategic Sourcing

Overhead of Supply Chain Costs What Are the Costs?

More Effective Supplier Interaction

Traditional Purchasing Analytical Procurement

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Supplier Management and Strategic Sourcing

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Supplier Management and Strategic Sourcing

1) Assess Current Spend 2) Complete Supplier Analysis 3) Complete Supplier Cost Analysis 4) Identify Suitable Suppliers •Conduct General or Specific Spend Analysis •Determine Analysis Period •Determine Who Offers What •Determine the Cost of Goods and Services •Select Suppliers Based on Business Requirements 5) Develop Sourcing Strategy 6) Conduct Supplier Negotiation •Determine Where to Buy Goods and Services •Consider Supply Situation While Minimizing Risk and Costs •Focus on Products, Service Levels, Prices, and Geographical Coverage 7) Implement New Supply Structure •Communicate New Supply Structure 8) Track results •Establish KPIs and Supplier Review Process 9) Restart Assessment •Focus on Continuous Improvement

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Supplier Cost Analysis (Supplier Price – Cost Management)

Well, there are three things in that title. First “suppliers” – companies responsible for keeping buyers in the supply of products when needed at the right cost. Second “Price-Cost” – the two terms go together. There are several aspects of price, of course, but the key concept has to do with looking holistically at the buyer’s side of costs, not just the supplier’s price. It’s obviously not only purchase and delivery price that matters, but your internal costs for acquiring, managing and using that product or service.

Finally, there’s “management:” that means really understanding these price-cost trade-offs, and dedicating the resources to do so effectively. It’s not just sending your buyers out to get the best price, it’s also giving them the training and support they need to go out and get a better understanding of cost.

Reference: Sourcing and Procurement: Understanding Supplier Price-Cost Management in Sourcing By: Dr. Ed Marien. 9/18/2007

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Sourcing Strategy

• A successful sourcing strategy requires a thorough understanding of a company’s business strategy, the resources required to deliver that strategy, the market forces and the unique risks within the company associated with implementing specific approaches. • A periodic review of the sourcing strategy ensures achievement of desired results and continued alignment with business objectives.

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Sourcing Strategy

•

Some of the sourcing strategies that are used in supply chain management today include:

•

Single Sourcing

: A method whereby a purchased part is supplied by only one supplier. A JIT manufacturer will frequently have only one supplier for a purchased part so that close relationships can be established with a smaller number of suppliers. These close relationships (and mutual interdependence) foster high quality, reliability, short lead times, and cooperative action. •

Multisourcing

price. : Procurement of a good or service from more than one independent supplier. Companies may use it sometimes to induce healthy competition between the suppliers in order to achieve higher quality and lower

Outsourcing:

The process of having suppliers provide goods and services that were previously provided internally. Outsourcing involves substitution—the replacement of internal capacity and production by that of the supplier. • Insourcing: The goods or services are developed internally. Reference: http://www.apics.org/

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Sample Supplier Review Components

• • • • • • • •

Quality objectives EDI and eCommerce activity and capacity Regulatory compliance Customer service Communication Capacity Performance delivery Adherence to KPIs or metrics

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More Sample Supplier Review Components

• • • • • •

Price

- Are you getting the best price? Does your supplier offer bulk discounts or other favorable terms?

Quality

- Are you satisfied with the quality of your supplies?

Innovation

- Do your suppliers regularly inform you of new products and services that might help improve your business?

Delivery

- Are your suppliers punctual? Do the supplies arrive in good condition?

Account Management

- Do your suppliers respond quickly to any orders or queries that you place with them?

SLAs

- Are your suppliers living up to their end of the agreement?

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Service Level Agreements (SLAs)

• A service level agreement (frequently abbreviated as SLA) is a part of a service contract where the level of service is formally defined.

• In practice, the term SLA is sometimes used to refer to the contracted delivery time (of the service) or performance. • As an example, Internet service providers will commonly include service level agreements within the terms of their contracts with customers, as a way to signify to their customers that their service may go down from time to time and that they must accept this breach in service as a (non refundable) possibility.

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Summary

• Maximizing DPO can improve cash flow, but needs to be negotiated with your suppliers • Consider the Rate of Return when making a decision to take discounts • Settlement through a P-Card can maximize float and provide significant rebates • EIPP reduces paper invoices and is a way of automating the Accounts Payable process • Managing relationships with suppliers can lead to improved performance, reduced pricing, additional discounts, and better Payment terms

Discussion & Questions

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Chris Doxey, CAPP, CCSA, CICA Consultant, Internal Controls and Business Process Best Practices [email protected]

Office: 703-840-2215 Mobile: 571-267-9107

Thank You!

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866-827-6389 770-984-1184 www.TheAPNetwork.com

© 2012 Financial Operations Networks LLC