organizations to be more careful about how they manage their money. As more and more
businesses face cash flow problems, accounts payable departments – whose job it is to pay the
bills – must look for cost savings.
There are plenty of ways AP managers can 'recession-proof' their departments, including
capturing discounts, maintaining open communication with their suppliers, and in some cases
outsourcing their AP functions. While AP can't simply decide to stop paying the bills, they can
learn to pay strategically.
As discussed in the TAPN article AP and Cash Flow: When Cash is Tight, stretching payment terms
is often an effective way to maximize cash-on-hand. Instead of paying vendors in 30 days, pay in
45 or 60. AP can use this extra time to earn interest on the funds.
Despite the benefits, however, stretching vendor terms can be dangerous. AP should always try to
get the vendor's consent before going forward. Otherwise, they risk damaging their own
organization's credit rating and the relationship with their suppliers, which could cause long-term
harm to their organization.
vendor discounts. The most common discount term is 2/10 Net 30, meaning the buyer receives a
2 percent discount for paying within ten days.
According to TAPN benchmarking survey results, 90 percent of respondents reported that they
take advantage of invoice discounts at least sometimes. Buyers in the wholesale, retail, professional-scientific-technical services, and utility industries are the most likely to receive early
payment discounts. (See Survey Results: Early Payment Discounts).
Judy Bicking, former global accounts payable director for Johnson & Johnson, says the best way to
go about adjusting payment terms is to involve your suppliers. Changing payment terms isn't
something an organization wants to spring on their vendors. She recommends departments send
all their suppliers a letter proposing the change.
30 or 2/10 net 45. Also include a statement saying 'if we don't here from you, we will move to net
30'. In some cases, you may want to push extended terms."
Bicking says that many suppliers will accept adjusted terms if AP contacts them first. In addition
to the letter, she recommends calling vendors and explaining that times are hard and that earlypay
discounts or extended terms will help they buyer stay afloat.
"Most suppliers I have done that with have accepted longer terms because they understand," she
says. "You want to be in a good standing with them in the first place so that if a recession hits
they will be more cooperative."
Discounts or Stretched Terms?
While invoice discounts and longer payment terms help suppliers survive cash crunches, which
method is the most beneficial? The answer depends on the buyer's cost of cash. For instance, if
the buyer earns a very high return through its financial institution, then they may benefit more
from holding onto those funds an extra 15 days. Alternatively, buyers with lower returns would
benefit more from a discount.
depends on when the buyer has the available funds to pay. "You want to match payments to meet
peak cash days so you don't have to hit your receivables line," he says. "[The vendor] may be
offering a 1 percent discount, but that might mean hitting their [the buyer's] receivables line
that's maxed out. Instead, they'd ride out the vendor for 30 days or more."
Bicking says that invoice discounts are typically preferable over stretching payment terms.
However, she adds that vendors don't usually understand the benefits and are more likely to
accept extended terms over an invoice discount.
"Financially, vendors should accept the discount because they get their cash quicker," she says.
"The 2 percent they are giving up isn't anything compared to getting the cash in ten days. But, it's
like doing tax returns. People don't understand the logic so they ignore what they don't know and go for the extended term."
An effective way of selling the idea of invoice discounts with vendors is to discuss it with the
vendor's controller or treasurer. Once financial professionals are convinced, they can explain the
benefits to the sales and marketing people.
While Bicking says discounts are usually the best way to go, in situations where buyers have
excess supply, it may be better to stretch terms. Stretching terms allows buyers time to pay the
vendor with money earned from selling their previous supply.
Benefit from the Slowdown: Expand Employee Responsibilities
During an economic slowdown, AP departments will likely face a reduced workload as cashstrapped
organizations cut back on purchasing. The first temptation for many AP employees in
this situation is to stretch out their processing tasks to fill up the empty time. Managers should
instead reassign these employees to more value-added tasks.
recommends reassigning them to other jobs, such as reviewing the vendor master file, dealing
with vendors to secure early payment discounts, and working on analytics.
AP can analyze the organization's purchase history and find ways to consolidate vendors. "They
can look at the company's top suppliers and see what they are buying by commodity," Bicking
says. "With office supplies, AP knows there are three or four suppliers they are buying office
supplies from. Staff can take that information to purchasing and tell them to negotiate with one
supplier the volume of all four."
When selecting staff members to take on these extra assignments, Bicking suggests looking for
employees that have displayed motivation in the past. Employees that make suggestions during
meetings, ask questions, and generally show interest in the process are ideal candidates. The
extra work will be a great learning experience for them that could lead to advancement
Many organizations have unused credits that they may have forgotten about or never received.
When money is tight, suppliers may neglect to send out credit memos. Instead, they may only be
sending past due invoices along with their buyer's monthly statement. Bicking suggests assigning
staff members to track down any unused credits.
AP staff should send letters to all their vendors asking for any uncollected credit memos and cash in advances that were paid and never refunded. In some cases, buyers may have credits going
unused because there are no invoices against them. If this is the case, AP should call those
suppliers and ask for checks instead.
says. "Suppliers often expect you to know you have a credit. No one knows that these credits and
cash on accounts are out there. There are enough dollars out there where it's worth a company's
while to do this on an annual basis."
In addition, managers should assign AP staff to look at paid invoices that included freight charges.
Bicking says that vendors routinely profit from inflating freight charges. AP should make a list of
all vendors who charge freight on the invoice, and change the arrangement to begin paying
freight charges directly to the carrier. Some vendors will credit the inflated freight charges if you
By seeking these unused credits, managers are essentially turning their AP department into an
accounts receivable department.
Another way AP departments can add value to their organizations during an economic slowdown is
to support employee training initiatives. Managers could put teams together to review the
procedure handbook looking for ways to process bills faster and improve efficiency, then teach the
new procedures to the staff.
and when they do; are surprised by what they find. "Managers are always surprised by how many
people say 'I didn't know we were supposed to do that,'" she says. "They're just kind of lost."
During a period of reduced workload, staff can focus on tasks like reviewing the policy manual and
updating the disaster recovery plan. These kinds of activities are often overlooked when there are
plenty of invoices to process. However, a department that is well versed in its processes will be
better armed to fight duplicate payments, fraud, and other issues.
"As mundane as these tasks are," Bicking says, "they are critical to the success of the staff's
responsibilities. It's about protecting the cash."
In addition to knowing how to survive an economic downturn, 'recession-proofing' AP also involves
preparing for a potential problem, which often means cutting costs. Many AP departments have reduced their expenses by outsourcing some or all of their payables operation.
AP outsourcing can come in two distinct flavors:
1. The buyer outsources specific AP functions, but keeps bill processing in house. "In some
cases we [the outsourcer] may do scanning, or we may do check printing," Halleen says.
"In most cases we're doing the capture of the input and archiving so they can access it
anywhere from our central repository using their browser."
2. The buyer outsources their entire AP operation to a third party. Under a full outsourcing
agreement, the provider manages the receipt, capture, data entry, workflow, and payment
of all invoices. The outsourcer contacts the vendors to establish rules for submitting
invoices and making disbursements.
Halleen says it's common for buyers to outsource only a few functions at first before
implementing a full solution.
When outsourcing AP – in full or in part – Halleen says the buyer should maintain at least a
minimal in-house presence. The employees that remain in AP are what he calls the "knowledge
"They would be doing strictly high-level things like advising management, negotiating contracts,
handling issues with contracts, handling disputes with over-delivery, damaged deliver, those kinds
of things," he says. "Things where you need senior-level people making decisions."
In a full outsourcing agreement, Halleen says he will also leave behind a liaison between API and
the buyer. In some cases, the liaison will actually be an API employee. In even rarer cases,
Halleen has hired the buyer's entire AP staff and left some individuals onsite. The key is that there
is a constant link between the outsourcer and the buyer.
Outsourcers like API give buyers access to the benefits of automated invoice processing without
having to make the IT investment. The buyer can now receive, route, and pay invoices
electronically, allowing them to process bills faster and earn discounts. For many companies with
reduced IT resources due to an economic slowdown, outsourcing may be the best option for
"For many of the companies engaged with us, they can have the total technology solution in 60,
90 or 120 days," Halleen says. "In the worst case, if you go out and buy and implement the
technology yourself, you're probably looking at 18 months and hundreds of thousands of dollars."
Taking payables outside the organization helps ensure business rules and controls are followed.
Inside many internal AP departments, there are individuals who routinely give concessions to
longtime vendors. These concessions often violate business rules. Outsourcers typically stick
closely to the rules and controls.
"From a control standpoint, you can't have people making deals with vendors on the side,"
Halleen says. "We [outsourcers] have no motivation to do that. If it does occur [at the client
organization], people would know because it means we would have to change the business rule. It
gives you another layer of control."
outsourcing providers, API goes through a SAS70 Type II audit each year. The audit guarantees
the buyer's payment processes are SOx-compliant, reducing their own compliance costs.
Outsourcers tend to concentrate on process improvement. For example, API operates a Six Sigma
program and regularly performs process improvements. In addition, Halleen says organizations
that outsource payables find they no longer need to hire audit recover firms to look for
overpayments. "You're getting a double layer of quality assurance so double-paying isn't really a
big problem," he says. "They [audit firms] are not really interested in coming into an account after
Outsourcing is an effective way to reduce costs and help insulate an organization from recession.
With process improvements and headcount reduction, Halleen says outsourcing can reduce a
buyer's AP budget by 30 to 70 percent.
Expect the Best, Prepare for the Worst
Recession-proofing AP involves a combination of process improvements and cost-reduction
strategies. Whether the buyer is outsourcing their AP operation, working with vendors to earn
invoice discounts, or taking advantage of a reduced workload to improve employee performance,
an economic slowdown doesn't mean AP should stop innovating. Innovation actually becomes
more important and a slowdown provides a unique opportunity to pursue it.