STREAMLINING THE FINANCIAL SUPPLY CHAIN The tools and strategies to transform payables into a financial force

Transcription

1 THE CFO S GUIDE TO STREAMLINING THE FINANCIAL SUPPLY CHAIN The tools and strategies to transform payables into a financial force

2 2 I STREAMLINING THE FINANCIAL SUPPLY CHAIN INTRODUCTION Many members of the finance team especially those in accounts payable continue to rely on manual processes to support sourcing, invoicing, billing, and payables. Disparate tools and opaque systems can make it difficult to close the loop on the financial supply chain (FSC), which encompasses transactions related to the purchase of, and payment for, goods and services. Progressive finance professionals are automating the source-to-settle process to provide greater visibility into all supplier interactions, improve working capital performance, and turn their focus to more strategic initiatives. The CFO and supply chain leadership are both shifting from a backward-looking view to a forward-looking view, said Rodolfo Santamaria, VP Supply Chain Operational Excellence and Compliance for ADT Security Services, at a recent Argyle Executive Forum virtual event on the modern financial supply chain. One challenge to automating the source-to-settle process is a lag in investment in systems and processes. According to the Institute of Finance & Management s 2015 Accounts Payable Survey, nearly one-quarter of companies (24 percent) cite too many competing projects as the primary obstacle to automating the source-to-settle process. Other top barriers include a lack of capital funding (17 percent) and limited IT resources (12 percent). Financial supply chain ROI can be calculated based on a number of quantitative factors, including cash flow uplift from keeping payments at target with contract agreements. Cash discounts received for paying vendors early as a percentage of total payments also contribute to ROI, as does a reduction in full-time employee (FTE) hours required to process payments and handle exceptions. Forward-thinking companies that capitalize on procurement process automation are reaping the benefits. Highly automated companies have reduced their purchasing costs to less than $5 per purchase order, The CFO and supply chain leadership are both shifting from a backwardlooking vew to a forward-looking view. Rodolfo Santamaria, VP Supply Chain Operational Excellence and Compliance for ADT Security Services

3 3 I STREAMLINING THE FINANCIAL SUPPLY CHAIN compared to $18 for nonautomated companies, according to research from The Hackett Group, a consultancy focused on process and business transformation strategies in the areas of finance and procurement. Fueled by the latest tools and systems, the finance team can capture all appropriate discounts and make informed decisions about extending payment terms to partners, among other value-added tasks. Automation also mitigates the risk of fraudulent vendor payments, which have recently hit even the most risk-aware companies. In addition, the finance team can leverage rich data to identify areas where the company can benefit. This is only possible when there is complete visibility into the FSC and all interactions with vendors, including those that occur prior to purchase order, to gain a clear view of the relationship. Ultimately, a finely tuned financial supply chain raises the profile of the CFO and the finance team, enhances finance s value as a partner in business performance and innovation, and leverages payables as a financial force. Topics explored in this ebook include: q The current state of the FSC, including challenges being faced and opportunities for improvement q How business networks provide opportunities for finance and accounts payable to collaborate to reduce liquidity risk and drive value q Uncovering opportunities to work more effectively with a global network of suppliers and customers to manage risk and compliance, reduce costs, and identify areas for growth q Aligning working capital and accounts payable metrics, including a review of return on short-term liquidity, days payables outstanding, days sales outstanding, and cash conversion cycle q Implementing FSC processes supported by technology to help finance deliver even greater value in the future A finely tuned financial supply chain raises the profile of the CFO and the finance team, enhances finance s value as a partner in business performance and innovations, and leverages payables as a financial force.

4 4 I STREAMLINING THE FINANCIAL SUPPLY CHAIN ADDRESSING CURRENT CHALLENGES, INCLUDING A LACK OF VISIBILITY The FSC is a disparate collection of systems and processes, which makes it difficult to have complete visibility into performance. The typical scenario is: procurement makes a purchase, and accounts payable receives an invoice and makes payment. A lack of common systems and processes for procurement and finance has hampered visibility, experts noted. In the past, finance and procurement have been on different systems, which has made it hard to bridge the gap between financial and non-financial data, said Nilly Essaides, Senior Research Director with The Hackett Group. Limited visibility means that opportunities for early-payment discounts are being missed and invoices are being overpaid, according to Drew Hofler, Senior Director, Marketing, SAP Ariba solutions. If a purchase order and invoice are not connected on a platform, then it is difficult to ensure that the invoice is correct, which slows down the approval process and thereby impacts the ability to pay early for a discount. There has been an emphasis on shifting costs from buyer to supplier in the FSC, rather than eliminating them. The financial supply chain is primarily misunderstood, said Alan Cohen, Vice President, Business Development & Strategy, SAP Ariba Payables solution. Procurement professionals are very comfortable negotiating price, but are not necessarily as good at negotiating payment terms or fully understanding the value of working capital management. Limited visibility means that opportunities for early-payment discounts are being missed and invoices are being overpaid.

5 5 I STREAMLINING THE FINANCIAL SUPPLY CHAIN REDUCING LIQUIDITY RISK AND DRIVING VALUE Treasury and procurement can have competing objectives. The chief procurement officer (CPO) and the procurement team are measured on the amount of cost reduction they can generate which typically involves negotiating prices. Procurement has an incentive to agree to early payment to gain a discount. Treasury takes a different view of accelerated payments, as they are focused on ensuring liquidity and maintaining cash on hand to fund projects. They would prefer to keep the cash in the bank until the payment is due. Developing a scorecard with treasury and procurement goals in mind can help these departments work in concert toward shared objectives.

6 6 I STREAMLINING THE FINANCIAL SUPPLY CHAIN One of the key benefits of an FSC solution is the ability for finance and procurement to collaborate on improving the overall financial performance of the supply chain, rather than concentrating on cost reductions, Cohen explained. It is not strictly about price. It is about adding value. Companies are extending payment terms, but they are not always balancing that with alternative sources of liquidity. Most buying organizations are seeking to extend terms broadly, and that isn t always the best approach. When an invoice makes its way to the finance team, the company has already committed the funds, so they need to consider taking advantage of early-payment discounts versus keeping the cash on hand. Taking advantage of dynamic discounting typically yields an APR of 12% to 36%. (Dynamic discounting is a sliding scale whereby an earlier payment receives a larger discount. The buyer and the seller can agree on the amount of the discount on an invoice-by-invoice basis, often through an online tool). In a prime example, a Fortune 100 pharmaceutical company was seeking to optimize its working capital without disrupting supply chain cash flow. A combination of payment term extensions and dynamic discount programs were used to achieve that objective. The result was over $300 million in free cash flow and a contribution of more than $10 million to the income statement. The company moved $5 billion in spend from net- 45-days to net-60-days payment terms across 38,000 suppliers in 40 countries. Early-payment discounts increased by 12% over the previous year, delivering more than $6.5 million in savings from the discounts. Siloed solutions do not enable finance and procurement teams to access the data and analytics they need to identify and respond to payment trends. A business network provides a fact-based view that can incorporate internal and external data, said Brent Kinman Vice President, Sales, SAP Ariba Payables solution. The analytics available through a business-network solution enable you to fish where the fish are by prioritizing outreach to suppliers based on payment history. The analytics available though a businessnetwork solution enable you to fish where the fish are by prioritizing outreach to suppliers based on payment history. Brent Kinman Vice President, Sales, SAP SAP Ariba Payables solution

7 7 I STREAMLINING THE FINANCIAL SUPPLY CHAIN UNCOVERING OPPORTUNITIES TO COLLABORATE WITH SUPPLIERS Working with a global network of suppliers can be challenging for accounts payable run as a shared service, as they are often dealing with many smaller firms who would benefit from flexibility in payment terms and financing options. The finance team must balance suppliers desire for flexible payment terms with their own cash management needs. A network of suppliers should represent the best possible options, with payables options and issues worked out in advance to the best mutual advantage, A B2B Angie s List or Amazon that gives us assurance that

8 8 I STREAMLINING THE FINANCIAL SUPPLY CHAIN we are sourcing things from the right place would be very valuable, said Alison Weber, CFO of a division within Henry Schein, Inc., at a recent Argyle Executive Forum virtual event. A business network enables the finance team to provide more flexible terms while limiting risk. In many cases, the data available through a business network enables the finance team to make decisions about extending payment terms to a supplier or offering financing by leveraging better information than many banks could easily obtain, said Kinman. Suppliers gain visibility, faster collections, options for earlier payment, and a reduction in days sales outstanding (DSO), among other benefits. More robust data fosters stronger partnerships and opportunities to enhance the process to benefit both sides. Collaboration is best achieved when you re working with suppliers on improvements, rather than just issuing mandates, experts concluded. A business network can also help ensure compliance with both Sarbanes- Oxley and Value Added Tax (VAT), which is assessed on the value added to goods and services that are bought and sold for use or consumption in the European Union. A business network can also help to better manage reputational risk, experts noted. Greater visibility into the entire source-to-payment process can help you monitor whether suppliers are complying with child labor laws, for example, so security and controls are important, Cohen said. You don t want to be in The Wall Street Journal for the wrong reasons. Business networks can also automate functions such as supplier onboarding and electronic invoicing. Electronic invoicing in particular helps provide visibility into when a purchase needs to be funded and how much it is going to be, helping the finance team manage liquidity better, said Amy Fong, Associate Principal, The Hackett Group. You don t want to be in The Wall Street Journal for the wrong reasons. Alan Cohen, Vice President, Business Development & Strategy, SAP SAP Ariba Payables solution

9 9 I STREAMLINING THE FINANCIAL SUPPLY CHAIN ALIGNING WORKING CAPITAL AND ACCOUNTS PAYABLE METRICS To optimize the cash flow linked to Payables, AP must work closely with the CPO and procurement team to maximize the value of the FSC. Days payable outstanding (DPO) and DSO are two of the key metrics that can impact cash flow. It is critical for buyers and suppliers to agree on payment terms to ensure that DSO and DPO are aligned with the financial objectives of both companies. There should be a focus on liquidity from an internal and external perspective to ensure a steady supply of goods and support strategic supplier growth. Another key metric that will impact cash flow is the percentage of contracts with standard payment terms, according to The Hackett Group s Fong. This helps ensure more accurate cash flow forecasts. A business network can automatically capture contract details and confirm that payment terms are being met. Ensuring that payments are being made according to the terms of the contract helps in terms of managing cash flow. Treasury, which manages corporate liquidity, borrowing, and investments in coordination with other areas, should clearly communicate the company s cash management goals to ensure that procurement and accounts payable are aligned on the company s short- and long-term strategies. Is the goal to grow organically, build a new plant, or add new stores? Whatever the mission is, the financial supply chain should be viewed as a competitive advantage, Hofler added. Whatever the mission is, the financial supply chain should be viewed as a competitive advantage Drew Hofler, Senior Director, Marketing, SAP SAP Ariba solutions

10 10 I STREAMLINING THE FINANCIAL SUPPLY CHAIN CONCLUSION Finance professionals are focused on optimizing cash flow to fund growth, support innovation, and expand into new markets or regions. Their colleagues on the procurement team are not always attuned to the cash flow needs of the organization. Procurement s role has traditionally been to find the lowest-cost providers of goods or services that the company needs. While the strength of the procurement department is negotiating price, progressive companies are taking a more strategic approach to working with suppliers on payment terms that can have a significant impact on cash flow. A strategic FSC requires greater visibility into the supplier relationship, which is hard to achieve with manual processes. As a result, forwardthinking companies are implementing business networks that provide greater insight into financial and non-financial metrics to inform datadriven decisions that impact the FSC. And as robotics and business intelligence tools further streamline routine transactions and decisions, the value of business networks will increase exponentially. Key takeaways from this ebook include: q Automating the source-to-settle process and developing strong relationships between buyers and suppliers are key goals for AP delivered as a shared service. q Business networks can shine a light on opportunities for buyers and sellers to collaborate in ways that will further the business interests of both parties. q By focusing on metrics such as DPO and DSO, accounts payable can collaborate with the CPO and procurement team to maximize the value of the financial supply chain.

11 11 I STREAMLINING THE FINANCIAL SUPPLY CHAIN ABOUT SAP ARIBA SAP Ariba solutions are how companies connect to get business done. On Ariba Network, buyers and suppliers from over two million companies in 190 countries discover new opportunities, collaborate on transactions and grow their relationships. Buyers manage the entire purchasing process, while controlling spending, finding new sources of savings and building a healthy supply chain. And suppliers connect with profitable customers and efficiently scale existing relationships simplifying sales cycles and improving cash control. The result is a dynamic, digital marketplace, where more than $1 trillion in commerce gets done every year. Get more information about SAP Ariba Financial Supply Chain solutions.