Take Control and Optimize Accounts Payable

Companies can benefit enormously — both in cost savings and improved supplier relationships — by questioning the status quo in Accounts Payable (A/P).

For instance, why are you paying a particular supplier by check? Would you benefit if you made that payment electronically — say with a commercial card or through the Automated Clearing House (ACH) network? Similarly, why are you paying an overseas supplier in U.S. dollars? Would there be advantages to paying that supplier in its local currency? And what about the processes you use to initiate and manage those payments? Are there opportunities to bring automation to bear and become more efficient?
In Accounts Payable, it’s easy to fall into routines and allow inertia to rule. But there’s an alternative. You can start asking questions. You can re-evaluate the payment methods you use for each supplier and shift to other more efficient methods when appropriate. You can pay foreign suppliers in the optimal currency and work with your bank to minimize wire transfer fees. You can automate payment processes for added effectiveness. Bottom line: You can take control.
Optimize the use of each payment method
A good place to start is to evaluate how you are making all of your A/P payments today.
Always consider how the method and currency you use to pay a supplier impacts your relationship with that supplier. To put it simply, are you paying your suppliers how they want to be paid? Certainly there are other factors to consider, such as processing efficiency, but when you pay suppliers how they want to be paid, your chances of enhancing supplier relationships and receiving more favorable treatment — for example, better pricing or service or faster delivery — will certainly improve. To optimize A/P, your company should consider employing a variety of payment methods.
Here’s a look at the most popular methods and how you might best apply each one:
Checks. Checks are perhaps the least effective payment option on three critical fronts: fraud control, efficiency and payment timing. As a result, the number of checks being issued in the United States has been steadily declining, while electronic payment alternatives such as commercial cards and ACH payments are on the rise, as shown in the chart below.

Over a 7-year period ending in 2013, as the chart shows, the number of checks issued annually dropped 47%. However, they still represented a significant portion of noncash payments. Because of ingrained business practices, there’s no reason to expect checks to go away anytime soon either. As a result, treasury managers might consider analyzing whether their A/P payments are over-weighted in paper checks. Most companies won’t be able to eliminate check issuance. But part of taking control of your A/P involves limiting the use of checks to one-time payments — where setting up a recipient for a single electronic payment isn’t cost-effective — and to paying vendors who just won’t agree to be paid electronically.
Wire transfers. Although efforts are under way to introduce same-day ACH payment capability, currently there’s still only one option when a payment needs to be settled intraday, and that’s a wire transfer. Due to the relatively high cost of wires, however, you might want to limit their use in domestic transactions to high-priority payments requiring same-day transfer of funds that are initiated at the request of the recipient. In addition, wires are often used for payments to overseas suppliers, where alternative global low-value methods are not as widely available.
The ACH network likely provides the best combination of speed and cost efficiency for making recurring U.S. domestic supplier payments, as well as payroll, tax payments and employee reimbursements. ACH offers next-day settlement and strong fraud control, while transmitting remittance and return information very efficiently from bank to bank. Phase-in of a same-day clearing and settlement option for ACH transactions will begin in September 2016. The biggest challenges with ACH payments are set-up and maintenance, reconciling payments to invoices, and getting all suppliers to accept electronic payments rather than checks.
Commercial cards. An electronic payment method that’s gaining in popularity is the commercial card, which is being used to pay for everything from small-dollar office purchases and business travel to fleet expenses and supplier invoices. Spending associated with purchasing cards — a prominent type of commercial card — is growing nearly 11% a year and will reach $377 billion annually by 2018, according to a 2014 study conducted by RPMG Research Corporation1.

Commercial cards streamline the procure-to-pay process, saving time and enabling companies to redeploy Accounts Payable staff to more value-added work. Plus, commercial card payments enable buyers to pay their suppliers almost immediately — eliminating much of the float associated with check payments — while improving their own days payable outstanding (DPO) because they don’t have to release funds until they are billed by their bank.

Commercial cards often provide the richest transaction-level data, enhancing a company’s ability to negotiate supplier discounts, and they offer spending controls to minimize fraud and promote adherence to company spending policies. What’s more, many commercial card issuers have programs that allow companies to earn cash rewards based on a percentage of commercial card spend. The biggest challenge with commercial cards is supplier acceptance due to the healthy interchange fees that recipients must pay on commercial card transactions. However, sometimes negotiating an earlier payment date can alleviate concerns recipients have about interchange fees.
The “Payment Method Comparison” table below provides a snapshot view of how the various payment methods fare across a range of criteria. To optimize A/P efficiency and maximize supplier advantages, treasury managers should consider the strengths and challenges of each method and work toward using the most appropriate method for each A/P transaction.

Evaluate payment methods and initiate change
A key step in optimizing A/P is to gain a thorough understanding of who your organization is paying today and the nature of those payments, including their frequency, purpose and value. Ultimately, you might want to consider grouping like suppliers and assign each group to the most appropriate payment method. To conduct such an evaluation, you will need the supplier list from your A/P system and a year’s worth of payment data. Payees can be categorized as recurring suppliers, one-time suppliers, petty cash vendors, payroll recipients, T&E vendors and large-dollar Treasury transactions. Furthermore, each group of suppliers can be sub-divided based on whether the payments are domestic or international.
As the first phase of your A/P optimization program, you could identify your high-value supplier payments and work to get them on commercial card payments in order to maximize rebates and take advantage of all the other benefits of commercial cards.
Next, consider identifying all of the recurring supplier payments that can’t be migrated to commercial card, for whatever reason, and make a push to get those suppliers to accept ACH payments.
There may be some suppliers that must be paid by wire transfer — such as for large industrial purchases of chemicals or other commodities. International suppliers and capital markets trading settlements may require wires, too.
The remaining suppliers, and hopefully it won’t be a large group, will be those that need to be paid by check. For these, you can choose between printing and mailing checks in-house or outsourcing that function to a bank or other third party. Outsourcing enables companies to shut down their in-house check disbursement operation and lower their overhead. When you outsource, you don’t need to invest in printing equipment or store and secure check stock. The outsource provider handles those duties and should be able to offer a lower cost per check issuance by leveraging their large-scale operation.
Re-assess international payment practices
Here are some international payment strategies to consider as part of your A/P optimization effort:
Proactively manage wire transfer fees. International wire transfers commonly flow through multiple correspondent banks, and “lifting” fees and intermediate bank fees can be assessed by these banks as each payment is routed to the destination country. As the payer, you might consider working with your sending bank to explore strategies for putting controls in place to avoid unnecessary bank fees.
Consider global low-value payments. The Federal Reserve and various banks offer cross-border low-value payment capability — essentially ACH for global payments. These services, which leverage the local low-value clearing networks in the destination countries, may be less expensive than making payments by wire transfer. Global low-value payments can support business-to-consumer payments such as pension or salary payments, insurance claims payouts, sales incentives or commissions, rebates, royalties and dividend distributions. Business-to-business applications can include supplier, utility, advertising, legal, consulting and outsourcing payments, among others.
Pay in the optimal currency. When evaluating your international payments, in addition to selecting the best payment method, consider whether you are paying each supplier in the optimal currency. Many foreign suppliers prefer to be paid in their local currency, and by offering to do so, a U.S. importer often can negotiate better pricing and extended terms. Many foreign suppliers don’t have a U.S. dollar account, so accepting a USD payment requires their bank to execute a foreign exchange (FX) conversion. Conversion fees cut into margins and can vary over time, making it difficult for foreign suppliers to forecast their cash flow. Additionally, because foreign currency volatility and FX conversion fees make the exact payment amount unpredictable, reconciling to the invoice or original USD payment amount is often challenging. Being paid in local currency can permit the supplier to issue an invoice in its native currency and lock in the contract’s value. The supplier doesn’t have to worry about the possibility of the USD value declining in relation to its local currency between the time of purchase and the FX conversion. What’s more, local currency payments can settle faster than USD payments. While not all foreign suppliers will want to be paid in their local currency, it’s always wise to ask.
Let the sending bank do the currency conversion. During the international wire transfer process, it’s quite common for one of the intermediary banks to automatically convert the payment from USD into the desired foreign currency at some point before it is deposited into the foreign supplier’s account. If the sending bank performs the currency conversion, rather than the beneficiary or intermediary bank, it gives the payer an opportunity to negotiate the conversion rate.
Optimize and automate information
Automation can also play a key role in bringing efficiency to an A/P function. Here are some automation strategies to weigh:
File integration with your bank. Talk with your bank about how it can accept payment instructions — and send back confirmations — in the most efficient and automated way. You want to reduce manual data entry and leverage file-based technologies to integrate with your bank as much as possible.
Leveraging all of the modules and capabilities in your ERP or treasury system. Many treasury operations aren’t fully leveraging their company’s systems’ capabilities for automating the flow of payment instructions and confirmations with their banks. For instance, are you using the latest version of each system’s software? Do you even have file transmission capabilities installed so you can communicate directly with your bank? As part of your optimization effort, you should discuss with your system vendors how you can maximize capabilities, and conduct a cost-benefit analysis to consider potential  investments in those systems.
Integrated payables. Integrated payables is a bank service that enables a business to send instructions for initiating multiple payment types to its bank in a single, consolidated file — instead of maintaining multiple file formats or manually entering payment instructions into multiple online systems. With this service, a business can reduce the number of instruction formats and files it generates from its A/P system, resulting in the need for fewer staff to manage and maintain payment formats and processes. Companies should determine whether their payments platform will support integrated payables and if the service can offer them significant benefits.
Invoice imaging. This is an increasingly popular technology solution for eliminating paper in the payables process. Companies may want to do a cost-benefit analysis to assess the value of capturing images of documents such as invoices and purchase orders, and determine if an imaging solution can be integrated with other systems and their payables process.
Electronic invoicing and payment. Many companies that work with large numbers of suppliers are adding efficiency and reducing operational costs — while fostering stronger trading partner relationships — by utilizing electronic invoicing and payment strategies. E-invoicing provides suppliers with much appreciated visibility to invoice information that can significantly reduce the time buyers spend responding to vendor inquiries. By instituting e-payments along with e-invoicing, buyers are also able to cut costs related to management and maintenance of equipment used to issue paper payments, as well as reduce related labor expenses. With cloud-based e-invoicing and payment networks bringing buyers and suppliers together to achieve these benefits, it’s an important option to consider.
Dynamic discounting. Dynamic discounting is a feature of some of these new e-invoicing and payment networks that can benefit both buyers and suppliers. Buyers can broadcast to their trading partners their willingness to pay early in order to earn a discount on their purchases, and suppliers can take them up on the offer online in order to improve their cash flow and address their financing needs.
Greater efficiency through SWIFT. Many treasury managers may want to take a fresh look at SWIFT reporting, file and messaging services as a uniform and potentially more efficient way to connect to all of their banks for payments. SWIFT is a bank-owned cooperative that connects more than 10,000 users in over 200 countries through a common communication protocol and set of financial message formats. Originally SWIFT was designed for use by financial institutions exclusively. In recent years SWIFT has introduced service packages targeted to meet the needs of middle-market and large corporate enterprises. The more bank relationships and higher volume a company has, the greater efficiency achieved with a SWIFT solution.
Benefits of taking control
The easy thing — indeed, the comfortable thing — might be to simply go along in Accounts Payable doing things like your company has done them for years. But that would forego a tremendous opportunity. Embarking on an effort to optimize A/P will ensure that you are making payments in the most efficient way possible, enabling you to reduce costs, allocate staff resources effectively, generate working capital through commercial card purchases, and produce a variety of benefits for your suppliers that are sure to improve your relationships with them.


Institute and communicate payables policies
Some companies have little in the way of written policies regarding payables payment practices. Other companies have policies but don’t always do a great job communicating them to staff. If either sounds like your company, another aspect of optimizing A/P will be doing some policy work. At a minimum, you want to have written policies covering each payment method, and employees need to be trained to understand and adhere to those policies. Here are some questions to get you started on developing or enhancing A/P payment policy:

  • When you onboard a new supplier, are you always asking them if they will accept commercial card or ACH payments?
  • Do you have a commercial card for petty cash expenditures?
  • Do you require use of a commercial card below a certain spend amount on purchases?
  • Do you require use of a commercial card for T&E expenses?
  • Do you require secondary approval for wire transfers?
  • Do you require employees to be reimbursed via ACH?
  • Do you limit the types of merchants from which your employees can purchase supplies?

2014 Purchasing Card Benchmark Survey Results, RPMG Research Corporation, www.rpmgresearch.net/product-view.php?product_id=60
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