Working capital management is a top priority for companies around the world – and many are actively working to improve the cash conversion cycle (CCC). This can be done in three ways: by reducing inventory held, reducing days sales outstanding (DSO) and increasing days payables outstanding (DPO).
While many companies have already optimized inventory levels, accounts payable and accounts receivable continue to be ripe for improvement. Accounts payable and accounts receivable can be addressed individually, but some companies are finding that the greatest benefits can be achieved by addressing both of these areas together. By converging AP and AR, companies can share knowledge between the two functions, make more informed decisions about emerging payments technology and negotiate more effectively with suppliers and customers.
What does the convergence of AP and AR look like in practice?
A convergence project typically focuses on three key areas: people, processes and technology. The first step towards converging AP and AR is to give a single person within the organization responsibility for both functions. Rather than having two separate reporting lines up to the chief financial officer, there is a growing trend for companies to appoint someone below that level – perhaps at senior vice president level – to own the two organizations.
With people from both groups reporting into him or her, this person is in a better position to improve working capital by taking a holistic view of the two areas. This model is particularly intuitive for companies using shared service centers, as the director of a shared service center or center of excellence tends to be responsible for both functions.
The more extensive the convergence, the greater the opportunities. For example, AR teams managing credit and collections are gaining more exposure to electronic payments, mobile payments and buy-side portals – so it makes sense to align these teams more closely with AP in order to share knowledge and benefit the whole organization.
Another consideration is that some of a company’s vendors may also be customers of the company, and vice versa. This may lead to opportunities to harmonize terms across the sales and purchasing relationships.
Co-operation between AP and AR can also lead to more informed negotiations with a company’s customers and suppliers. For example, a customer might claim that a clause within the contract is not typical within the relevant industry. Armed with information from the AP team, a vendor could counter this argument by pointing out that the disputed clause is common practice among its own suppliers.
It’s clear that converging the reporting lines for AP and AR can yield significant working capital benefits, but there are other ways for companies to bring the two functions closer together. The next two blogs in the series will look at the other components of AP/AR convergence: combining processes, and combining technology.
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