Finding the Hidden Cash in Your Organisation

Visibility, accessibility and availability of cash are critical to every business. Managing cash flow is one of the primary objectives for businesses to master but this is easier said than done. In reality, organisations are struggling to achieve visibility of the cash flow across multiple departments.

Credit lines remain tight following the recent economic turbulence, and it is now more critical than ever to understand where the cash deposits reside across the business. But it’s not all negative, many companies actually have more cash than they think – it’s just obscured from view. However, this ‘hidden cash’ means that businesses are developing growth strategies and plans based on an inaccurate view of its cash flow. According to the 2010 Cost of Control Report, poor visibility of key financial information undermines the chief financial officer’s (CFO) confidence in company performance, ultimately leading to doubts about profitability. In turn, 58% of CFOs set improving profit margins as a strategic priority in 2010, up from 39% in 2009.

This lack of visibility is also a symptom of business departments pulling in different directions. Finance often looks to improve working capital margins and cash positions through extended payment terms with suppliers. Procurement organisations are concerned with possible supplier viability and supply assurance risks whilst remaining laser focused on cost reductions. Accounts payable (AP) departments scrutinise every invoice for any possible inaccuracy that might enable them to reject the invoice and start the invoice handling process again. Such competing agendas compromise visibility, cash optimisation and cost reduction realisation.

Purchase-to-pay Process

At the root of all of this is the purchase-to-pay process (P2P). P2P is defined as everything that happens between the sourcing and ordering of goods through to the receipt and settlement of invoices, onto continuous performance monitoring and improvement of supplier relations.

When businesses take a more integrated approach to P2P, it can be used as a vehicle to free up working capital, drive more profitable relationships with suppliers and create a more agile finance function. This is where the P2P model comes into play – helping companies identify ways in which to optimise cash, manage cost and working capital management. This framework describes four stages companies typically go through as they look to create visibility and transparency through their P2P process.

A company can enter the P2P framework at any stage – it’s about identifying which characteristics resonate with the company’s current challenges and requirements. It’s critical that a long-term strategic plan is developed to map P2P excellence against the business objectives, otherwise investments will not align with the overall business direction. It also prevents short-sighted investments into technology without a clear understanding of what this technology is trying to achieve, how the systems will integrate and who will be using this technology.

Procurement and finance departments are the critical stakeholders of P2P excellence. Each party has traditionally owned an element of the process and while a large percentage of these responsibilities will remain with these parties, to achieve excellence collaboration and aligned strategy is fundamental. The 2010 Cost of Control research found 30% of organisations surveyed reported a recent increase in integration between finance and procurement functions. Such collaboration improves confidence, which finance professionals have been lacking during the recent economic cycle.

Once the stakeholders within the business have been identified, they need to come together to establish and understand the current state of P2P, automation and performance and agree on the long term goals. A mediator may be required to rationalise the requirements of the different parties involved and oversee the creation of a P2P plan that is conducive to the overall business strategy and not unfairly biased in favour of one stakeholder. Consideration also needs to be given to the processes and technology that may already exist within the business and where third parties may need to be enrolled.

Mapping Your Business Against the P2P Model

The scale of the P2P plan should reflect the time and resources the business has to invest into the P2P process; it can be scaled up and down accordingly. The purpose of the planning stage is to reach an agreement on the end goal and this should remain front of mind.

First, the business needs to be mapped onto the P2P model and an assessment can take place of where it currently sits in the cycle – whether that be the emerging company, the aligned company, the networked company or the agile company stages.

Each stage has different benefits and processes.

Emerging company

For the emerging company, automating processes is one of the first steps it needs to take. The invoice provides the source of truth about spend and cash commitments the company has made. However, traditional paper-based invoicing is slow, expensive and fails to provide transparency of spend. A typical company at this stage receives less than 10% of its invoices in electronic format, with little or no visibility to payment performance or spend under management. Paper processes also restrict the ability of the A/P department to be responsive to the needs of both internal and external stakeholders, including suppliers. By removing the paper element and automating invoice handling processes, the emerging company starts to achieve levels of greater visibility and control which allows them to get a grip on cash and payment commitments to their supply base.

Aligned company

Greater integration between procurement and finance is the core characteristic of the aligned company, with best practice process management and procurement technologies helping the once siloed departments to work in tandem. Finance is able to establish robust compliance procedures that reduce maverick spending by up to 40% and the procurement team begins to enable and integrate its supply base via direct goods requisitioning systems, ensuring P2P accountability is enforced at the point of need. An aligned company can start improving A/P productivity as a result of wider purchase order (PO) coverage and the ability to match and process the payment against POs.

Networked company

The defining characteristic of the networked company is the move to a fully integrated model covering finance, procurement and external suppliers – one allowing for strategic sourcing and management of the full contract lifecycle. Value from P2P begins to accelerate exponentially through the use of open networks to connect buyers and sellers of all sizes and regardless of data formats, with suppliers also benefiting from lower costs of doing business, greater process visibility and faster payment collections. Procurement elevates its relationships with suppliers and the flow of cash becomes seamless across the organisation, significantly improving the ability to forecast.

Agile company

The agile company has fully optimised processing costs throughout the P2P cycle and has reduced the cash-to-cash (C2C) cycle significantly. Department heads work collectively to implement innovative payment strategies, with full cash flow visibility allowing a company to lower the cost of capital and optimise its working capital positions. Shareholder value increases, as does the company’s credit rating – impacting top line performance as well as bottom line impact. Cash rich companies can also deploy innovative payment strategies to maximise discounts and ensure supplier assurance, while optimising days payable outstanding (DPO) and days sales outstanding (DSO) performance. This enhanced visibility and streamlined processes enables the agile company to operate with the greatest financial and organisational agility.

As a business advances and matures to achieve P2P excellence, results will be accelerated dependent on the investments it makes and how closely it follows the original P2P plan that was created before embarking on the process. If key stakeholders have been engaged early on and followed through with the actions they committed to, it will enable the business to progress towards the agreed goals much more quickly. Engaging key stakeholders early in the process and incorporating their voice is a key strategy to getting it right the first time.

At times it may feel to some departments that others are benefitting from their compromises, but this again emphasises the importance of a mediator in the initial stages to ensure the outcome is balanced in favour of the business as a whole, with all parties seeing similar returns on their efforts.

Improving the P2P process can deliver widespread benefits that translate into enhanced visibility and greater control. Critically the P2P model should deliver hard cash advantages and ultimately will restore confidence in profitability as every element of the business has a magnified view of the money flowing in and out of the business.

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