Traditionally viewed as a back-office cost center focused on basic transaction processing, accounts payable departments are often overlooked for their potential to positively impact the bottom line. However, rethinking this perspective can unlock millions.
Rather than resigning AP to a support service, distributors should elevate it as a core profitability engine. Here's how.
#1 Accelerating Payments to Maximize Discount Capture
For high-volume distribution companies, the prospect of earning a 2% or higher discount from suppliers is lucrative. With profit margins becoming increasingly compressed, these discounts provide a risk-free revenue boost.
Companies that have successfully made discount capture a priority are seeing massive returns. One industrial equipment distributor managed to increase its discount capture rate from 12% to 75% in just six months after automating AP and reprioritizing discounted invoice handling. This netted $4.2 million in new revenues from existing vendor relationships and invoice volumes.
However, most distributors report dismally low capture rates for these early payment discounts - in many cases less than 5% of available discount dollars are actually realized.
By pinpointing the root causes behind these challenges and restructuring AP workflows and processes, distributors can turn discount capture into a big win. This requires prioritizing and accelerating invoice approval cycles for any invoices offering discounts.
#2 Minimizing Late Payment Penalties and Interest Charges
While capturing discounts is an offensive strategy to create profits through accounts payable, minimizing late payment penalties is an equally critical strategy for plugging profit leaks. The hard dollar costs of penalties and interest charges for overdue invoice payments can run into the millions for distribution companies with heavy AP volumes.
Some of the common root causes behind preventable late payment incidents include decentralized AP operations across locations, manual routing of invoices for approval, inadequate escalation processes, and disconnects between procurement commitments and AP execution. These gaps delay payments past agreed-upon due dates and incur often hefty penalties per negotiated vendor terms.
To curb these profitability drains, distributors need enhanced visibility and proactive controls over payment cycles.
This proactive AP model not only caps avoidable penalties, but also strengthen relationships by positioning the distributor as a low-risk, predictable payer. One building materials distribution company was able to slash $3.8 million in annual late charges after automating payment processes and moving to centralized remittance schedules.
#3 Collaborate Across Procurement, Treasury and APs
While accounts payable is a distinct function, its processes are deeply intertwined with both procurement and treasury operations. However, many organizations keep these three areas siloed, missing out on valuable synergies and unified strategies.
By promoting more collaboration and data sharing between these three teams, distribution companies create a force-multiplier effect:
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Procurement negotiates terms/discounts with AP discount capture in mind
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AP provides procurement visibility into supplier payment risk profiles
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Treasury aligns payment timing/terms with AP to optimize cash conversion cycles
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Unified KPIs track aggregate spending, payment discounts, and payment risk metrics
Rather than disjointed processes and competing priorities, this unified team becomes a strategic profitability driver focused on controlling total supply costs, supplier relationship quality, and working capital optimization.
#4 Build an AP Center of Excellence and Continuous Improvement
For too long, accounts payable has been treated as an afterthought back-office function. To reach the full potential of reframing AP as a catalyst for profits and growth, distribution leaders must treat it as a strategic, valued capability.
By taking a metrics-driven approach to optimize AP's performance across areas like accelerating payment cycles, maximizing early payment discounts, minimizing late penalties, and collaborating across procurement and treasury, this back-office utility transforms into a strategic asset.
The Bottom Line?
The impact of unlocking AP's full potential is clear from the quantifiable results already achieved by pioneering distributors:
- The impact of unlocking AP's full potential is clear from the quantifiable results already achieved by pioneering distributors:
- Millions in new revenues from captured early payment discounts
- Hefty savings from eliminating avoidable late fees and interest charges
- Streamlined operations and reduced overhead from automated processes
- Tighter risk controls from centralized supplier payment monitoring
- Improved cash forecasting by syncing payment timing with liquidity needs
For forward-thinking distribution leaders, AP represents an overlooked gold mine for profit growth, cash flow optimization and working capital advantages.
Integratz specializes in comprehensively benchmarking key AP performance areas. Armed with this data analysis, we then engineer tailored solutions leveraging advanced automation tools to eliminate bottlenecks and wasteful processes.
If you've struggled with the problems outlined in this article, find a time to connect with us here. We'll map your unique challenges and requirements to spotlight the areas for maximum savings and efficiencies.
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