4 Areas You Need to Solve Before Starting an Early Payments Program
Early payment programs (EP) are in vogue. It’s easy to see why. As a finance professional it is difficult not to be seduced by the prospect of shifting AP from a cost to profit center. Just add some new software to your ERP and suddenly you have a healthier, happier supply chain coupled with (internally) newfound political clout. But beware the siren song of easy money. For any early payment program to succeed, hard work is required. While acquiring the software is straightforward (there are multiple providers), preparing your organization and your supply chain requires thoughtful consideration.
Here are four areas to think through before embarking on the EP journey.
From large suppliers through the long tail, it is not a small effort to contact, educate and convince companies to join an EP program. Even just identifying the right person(s) with whom to speak can be a challenge. Many suppliers won’t participate either because they have existing working capital solutions (e.g. factoring) or because they simply don’t face cash deficits. A thoughtful supplier-oriented marketing program with resources and clear KPIs is a pre-requisite.
For EP programs to work, an AP department has to move fast. That means receiving an invoice, providing approval, and issuing payments at sprinter’s speed. The larger the gap between the invoice due date and the early payment, the larger the benefit both to the supplier and to you. If you’re still receiving paper invoices or suffering through the inefficiencies of OCR, crucial days are being lost.
Is your AP team still fielding phone calls, emails or (gasp) faxes? Are those messages being routed through a single platform to maximize response time? Are the communications flowing through your ERP system or does your staff have to access a separate platform just to respond to inquiring suppliers? Is there an online vendor portal through which most supplier questions can be answered? If you want your EP program to thrive then the right answers are ‘No,’ ‘Yes,’ ‘ERP,’ and ‘Yes.’
Speed is a defining characteristic of successful EP programs. In a well humming AP operation, invoices should be received, ingested, approved, (automatically) responded to with attractive discount rates, and ultimately paid within 0-5 days.* Speed cannot mean sloppy, however, and the last step in this complicated dance is the payment. Ensuring not only the proper accounting reconciliation but also regulatory or tax compliance is critically important. It is one thing to earn a discount on a solitary invoice paid early. It is quite another to execute such a program at scale and maintaining regulatory, tax and accounting integrity through the process.
* 0 is possible thanks to automated workflows typically when the purchase order matches the invoice.