Posted by Steve Wilcox on Mon, Sep 28, 2009 @ 05:08 PM
This ivory tower comic from Abstruse Goose cracks me up:
As this comic illustrates, the term Ivory Tower designates a world where intellectuals engage in esoteric, over-specialized, or even useless research that is disconnected from the practical concerns of everyday life (ref. Wikipedia).
Contrast this to "empirical." Here's the definition from dictionary.com:
em·pir·i·cal
(ěm-pîr'ĭ-kəl) adj.
- Relying on or derived from observation or experiment: empirical results that supported the hypothesis.
- Verifiable or provable by means of observation or experiment: empirical laws.
- Guided by practical experience and not theory.
When it comes to "research," it's important to distinguish between "ivory tower" research and empirical research.
This is precisely why I am a big fan of The Hackett Group's research ... it is derived from experiment and observation rather than theory.
They have strong roots in benchmarking so they know how to collect vast amounts of data, analyze that data and then draw the proper conclusions and insights from that data.
This is especially important when it comes to emotionally-charged topics such as offshoring, shared services and outsourcing. To make sound business decisions, executives need to understand the facts ... not ivory tower theories.
Which brings me to our webcast on Shared Services where The Hackett Group's Penny S. Weller revealed the Top 10 insights from Hackett's 2009 Shared Services Performance Study:
#1 Shared services have reduced costs by exactly how much?
#2 Does anything else matter besides costs?
#3 What is the fastest growing driver for shared services?
#4 Reaching "Beyond the Transaction" to what else?
#5 How are "economies of skill" being leveraged?
#6 How does outsourcing fit into the picture?
#7 What 2 trends both drive and are supported by shared services?
#8 What will soon become rule rather than the exception?
#9 How important is talent?
#10 What are the globalization trends?
Enjoy the Hackett Shared Services webcast.
-Rakesh Shukla
Posted by Rakesh Shukla on Mon, Sep 14, 2009 @ 03:46 PM
Last week was about as bittersweet as it gets.
After an incredible 19-year journey, the company I co-founded was acquired by Kofax. It's a great move by Kofax and immediately catapults them into THE leadership position in the AP Automation space. Kofax also acquires a proven, bullet-proof workflow platform for expanding into other document intensive business processes. Kudos to their executive leadership for recognizing some amazing synergies which I will explore in my next blog post.
But first off, let me acknowledge my fellow co-founders, Karl Buttner and Erich Orenchuk. We all graduated from MIT in 1987 and founded 170 Systems in 1990 as eager 20-something entrepreneurs.
Erich is one of the smartest people I know. He reads the Federalist Papers for fun! Never one to say much, when he does speak, it is always insightful and thought-provoking. He is an unbelievably talented software developer. He single-handedly built many of our early products. And, oh yes, when he wasn't writing code, he was also our CFO for much of the 90s.
Karl is probably the hardest working person I have ever met ... I don't think he took a day off (including weekends) for our first 12 years! Nobody cared more than Karl. Whether it was employee happiness, customer "thrillment", product quality, or really anything related to 170 Systems, Karl cared deeply. His devotion to 170 Systems was unparalleled.
There have been many super-talented, hard-working and loyal employees over the years. Way too many to thank in this post.
By anyone's standards, 19 years is a long, long time ....
How long has it been?
A baby born in 1990 would now be a sophomore in college ... remarkably, from the first day we opened our offices in Cambridge, MA, an entire generation has grown up and graduated from high school!
We started the company during the 1990 recession, raised our first (and only) round of venture funding during the 2002 recession and now have sold the company during the 2009 recession. These milestones are a testament to the fact that our products and services have delivered compelling and tangible value through both good times and bad times.
Culturally and technologically, so much has changed since 1990. I really hadn't thought much about these changes until our lawyer from the very beginning, WilmerHale's David Westenberg, put together a great retrospective of then (1990) and now (2009).
Let me share some of his clever insights with you:
OK, thank you for indulging me down memory lane ... now that I have all that nostalgia out of my system, it's time to look forward. The Kofax acquisition of 170 Systems is brilliant on both on a strategic and tactical level. I'll explain more in my next blog post.
-Rakesh Shukla
@rakesh170
Posted by Steve Wilcox on Tue, Sep 01, 2009 @ 01:57 PM
O U C H!
Head butts hurt ... for BOTH head butters ...
You see, it's a law of physics; Newton's 3rd Law to be precise:
"For every action there is an equal and opposite reaction."
This law applies in the business world too:
"For every financial action there is an equal and opposite reaction."
Think about this if you are stretching payments to your suppliers and making them suffer by not paying on time. Sure, your actions will increase your short-term cash reserves but the "opposite reaction" from your unhappy suppliers may be quite detrimental to your core business. There are tradeoffs here that need to be carefully considered.
Before I go into more detail, let me provide some background.
Yesterday's Wall St. Journal had a front page article titled "Big Firms Are Quick to Collect, Slow to Pay." The gist of the article was that large companies are shafting their smaller suppliers by paying invoices late while at the same time squeezing their customers to pay earlier. The motivation to collect fast and pay slow is something I have written about extensively in past blog posts (see related blog posts below) and is summarized well in the following excerpt from the WSJ article:
"As credit markets remain tight and banks rein in lending, corporations are being forced to squeeze more cash from their day-to-day operations at a time when revenues are slowing and the economy remains weak. Companies are finding they can rely less on external funding and costly bank lines if they can bring cash in the door faster and hold on to it longer. The cash they save can be used to pay off debt or be invested in other parts of the business."
Companies with more than $5 billion in annual revenue took an average 55.8 days to pay suppliers and trade creditors in the second quarter, up 5% from 53.2 days a year earlier, according to REL. They also collected faster on their bills, taking an average 41 days versus 41.9 days a year earlier.
Businesses with less than $500 million in sales paid vendors in an average 40.1 days, down 6.5% from 42.9 days, REL found. They took roughly 8% longer to collect payments, or an average 58.9 days, versus 54.4 days a year earlier."
So big companies are paying slower and collecting faster while small companies are paying faster and collecting slower. In other words, "the biggest and fittest companies are often flexing their financial muscle, benefiting at the expense of smaller and weaker ones."
But are they really benefitting or are they being short-sighted?
So What are the Downside Risks of Stretching Payments?
The upside of stretching payments is obvious - you get to hold onto cash for longer. Since the days of easy credit to help fund operating expenses is over, you don't want to run the risk of running out of money. Keepiing cash for as long as possible has clearly become a strategic financial priority.
So what are the downsides - the "opposite reactions" - of stretching payments? Here are 7 HUGE risks:
- Higher Prices: Suppliers are NOT Banks. Suppliers will notice when shamelessly used as a no-interest loan source. Late payments may undo the favorable prices negotiated by purchasing. Vendors may simply raise prices to cover the costs of financing tardy invoice payments.
- Supply Chain Disruptions: Late payments may result in delayed shipments of goods and services. If these delays adversely affect your core business, is it really worth the hassle? If your finely-tuned supply chain is a competitive advantage, paying suppliers late may be like shooting yourself in the foot.
- Poor Quality and Service: Slow pay will probably mean poor quality and service. Responsiveness will plummet since what supplier is going to jump through hoops if they aren't getting paid? Suppliers know who pays quickly and who doesn't. When deciding who to help and who to delay, the answer will be clear.
- Second-Tier Suppliers: Having top-tier suppliers is a competitive advantage but you put that top-tier supply chain at risk if you abuse your suppliers' cashflow. The cash-rich suppliers that don't need your business will drop you for more profitable customers and you will have to go to your second choice supplier or the cash-starved suppliers will go out of business and be replaced by your second choice supplier. Either way, you risk losing your first-class suppliers and replacing them with second-rate suppliers.
- Competition Suffers: In this environment, banks are not taking one iota of risk by lending to small suppliers. If you exacerbate the problem by paying late, you may be driving a good supplier out of business. In the end, there will be fewer suppliers left to compete for your business. How is this good for your supply chain?
- Vexed Vendors: More gripes and kvetching from disgruntled vendors will lead to more disputes. This will suck the productivity out of your AP staff.
- Duplicate Payments: As Mary Shaeffer points out in her newsletter today, you could be making your cashflow situation WORSE by paying late. Why? Unpaid bills lead to duplicate invoices being sent by nervous AR departments. If you pay these duplicates, you are obviously making your cash situation worse!
The bottom line is this: Newton was a smart guy so pay attention to his 3rd Law of Physics: "For every action there is an equal and opposite reaction."
Sir Isaac Newton, Age 46
The opposite reaction may be delayed but trust me, suppliers won't forget.
You just can't stiff a supplier without consequences. Thinking otherwise is just naive.
-Rakesh Shukla
@rakesh170
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Posted by Steve Wilcox on Tue, Aug 25, 2009 @ 10:31 AM
What does ERP stand for? Anyone?
ERP stands for Enterprise Resource Planning and there is no doubt that ERP platforms such as Oracle and SAP, when implemented correctly, have powerful capabilities to help an organization fully leverage its most valuable resources including people, capital and assets. And yet, most ERP systems have struggled to meet expectations or deliver on their value promise.
The following sentiment has not really changed over the past few years:
"The evidence leaves little doubt that for most companies, ERP has failed to meet expectations or deliver on its value promise. It's hard to find an expert who thinks otherwise. "Based on our data, only a select few companies have gotten value out of their ERP implementations, and those are the world-class companies. The value for the average company is still many years away," says David Hebert, who leads The Hackett Group's business advisory services program in application ROI."
"What Did You Get From ERP, and What Can You Get?"
FEI Special Report, 2004
That same disappointment with technology investments continues today. Check out this chart which I have posted before:
Only 11% of respondents thought they were getting a high return from their investment ... and 43% believed they were obtaining a low, negative or unknown return.
So why are most ERP systems falling short on their promised value?
In a word: Process.
Using old, manually intensive processes hampers an ERP system's potential, particularly for Finance departments. Most companies have already spent large sums of money on sophisticated ERP implementations, but they are not always using this technology aggressively to their full advantage. Often, very little time, money and effort has been spent on enhancing the business processes that make use of these systems -- the old processes are simply retrofitted to work with the new ERP system.
And these retrofitted processes are usually dysfunctional.
To be clear, the processes are dysfunctional NOT because the ERP system is flawed but that critical pieces of information are often NOT online in a tightly integrated fashion, which causes the communication and collaboration channels to be highly inefficient - here we're talking about the back/forth e-mails, faxes, copies, interoffice mails, and Fed Ex's.
So what is the key to automating the business processes which touch these powerful ERP systems?
Workflow is one key but it is not enough. Automating a broken process still results in a broken process.
Workflow with TIGHT INTEGRATION IS THE KEY as this allows you to redesign a truly streamlined process.
I have seen time and time again that inefficient business processes can be dramatically improved to truly leverage your existing ERP systems if you capture all your information online, tightly integrate it together, and then provide a highly intuitive and intelligent way to interact with that online information.
After all, the ERP system is the transactional backbone of an organization. The ERP system's data repository should be the "single source of the truth." But often it is not the "sole truth" because ERP data is duplicated. ERP data should NEVER be duplicated as this will cause all sorts of synchronization and maintenance headaches.
With regards to AP, the success of an Accounts Payable process automation solution depends on how it leverages ERP functionality and business logic without duplicating ERP data. How the solution integrates non-ERP AP data (such as original invoices) is also critical.
-Rakesh Shukla
@rakesh170
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Posted by Steve Wilcox on Tue, Aug 18, 2009 @ 01:06 PM
Many years ago, I owned a 2-story condo in Silicon Valley. Unbeknownst to me, I had a leaky pipe in the upstairs bathroom. I guess it started as a very small leak that was undetectable. One weekend, I went skiing at Lake Tahoe. When I returned, I was horrified to find the entire condo flooded! That darn leaky pipe had burst, flooding the entire 2nd floor ... and ... the water leaked through the 2nd floor to flood the entire 1st floor ... and ... water leaked through the 1st floor to flood the neighbor's unit below! What a disaster!!!
The water damage was extensive ... and the repair costs prohibitive ... all because of a tiny leak.
Tiny leaks can turn into BIG leaks ... very swiftly. This is especially true when it comes to paying invoices.
If a company is struggling to meet its working capital requirements, a broken AP process is like a leaky pipe that can cripple cash needs. We all know that manual, paper-driven processes are ripe for "leaky" errors ... errors that can critically affect working capital. Keying errors, lost and/or misfiled documents and matching errors, as examples, can lead to duplicate payments & overpayments.
These payment errors directly affect available cash. And CASH IS KING right now.
In manual processes, most errors are human errors. As corporations continue to cut SG&A costs, human errors are going to rise. Count on it.
With the downsizing of finance departments, there is going to be a rise in careless accounting and transaction processing mistakes. Nowhere are the risks greater than in under-staffed finance departments - especially AP.
And here is where the real danger lies. In over-worked AP departments, small leaks (payment errors) run the risk of becoming a BIG leak that threatens precious operating cash reserves. Cutting staff in AP is invariably going to lead to more mistakes and errors in manual, paper-intensive operations.
Here's an eye opening statistic from Jon Casher, a well-respected procure-to-pay expert:
For $1 billion in spend, $2-20 million (0.2% - 2%) is erroneously paid
Drifting to the 2% end of the range is very risky at a time when working capital optimization is a top priority.
The solution? Automate your AP processes. And get rid of the paper as early in that process as possible. There is a direct correlation between automated processes and lower error rates (more on this in a future blog post).
-Rakesh Shukla
@rakesh170
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Posted by Steve Wilcox on Wed, Aug 12, 2009 @ 12:47 PM
What is the best technology for receiving, capturing, and entering invoices into your ERP system?
...Imaging?
...OCR?
...E-Invoicing?
...Supplier Portals?
The answer may surprise you.
Here's a clue. The best way to capture invoices depends greatly on the "Invoice Distribution Curve" shown here:
Let me explain this graph.
At a typical organization, at one end of the spectrum, a few high volume suppliers generate a very large number of invoices. What's the best technology for capturing invoices from these large suppliers?
At the other end of the spectrum, we have a whole bunch of tiny volume suppliers generating a few invoices each. What's the best technology for capturing invoices from these small suppliers? (Hint: It's probably different than what is needed for the large suppliers)
And then there is the "MASSIVE MIDDLE." No, I am not talking about my waist line. The massive middle of suppliers generate the bulk of the invoices. What is the best technology for capturing invoices from these medium-size suppliers? Again, it's probably different that what is needed for the large and small suppliers.
The Hackett Group's white paper,
Automating the Invoice Process: Optimizing the Approach and Building the Business Case outlines what to consider when choosing an AP Automation technology and how to decide the best approach for your organization.
-Rakesh Shukla
@rakesh170
Posted by Steve Wilcox on Wed, Aug 05, 2009 @ 10:04 AM
Question: What is the #1 reason why people cheat?
Answer: Money.
So it looks like David Ortiz and Manny Ramirez are on "The List" of players who used performance-enhancing drugs (PEDS) in 2003. Big, BIG news here in Red Sox Nation as it kinda taints the 2004 and 2007 World Series Championships.
Or does it?
Every power hitter from 1988 (and probably earlier) likely used steroids. Ortiz' career highs in HRs and RBIs were in 2003 after very average stats in his earlier years with Minnesota. Is it really that surprising that Big Papi started "juicing" before he became "good?"
The Ortiz story is a bummer but I am not naïve. Afterall, what sport is clean? I believe that most professional athletes dope. It's the only way to survive as a pro. If you do not dope, you will probably be out of a job sooner rather than later. The sad truth is that there is an undeniable economic attraction to steroids in professional sports (see Economics of Steroids). The more homeruns you hit, the more you get paid! Duh.
I am not shocked that cheating happens in pro sports where livelihoods and millions and millions of $$$ are on the line. Here is what I am shocked about -- cheating happens in youth sports too. I thought youth sports were different ... until this past week.
I am not necessarily talking about PEDs being used by middle school teens (which would be truly shocking) but cheating by coaches in particular. Let me explain.
At camps and youth leagues, most of the scoring and time-keeping is done by biased parties such as parents and/or coaches. It's an honor system. For example, at a basketball camp I recently attended, games were managed by one coach keeping track of the clock while the opposing coach kept track of the score. Since it is a summer camp, you just assume the other coach is trustworthy.
So here's the quick story - in a close game where I had the clock and the other coach had the score, the other coach blatantly cheated by not counting our baskets. We are talking not just 1 or 2 points but 10 POINTS! Yup, we scored 10 points that he didn't record. All the kids knew it. This coach wanted to win a summer camp basketball game so badly that he cheated. I was stunned. What was this coach thinking??? Did he think nobody would notice? The really sad part (for him) is that, from now on, whenever I (or the kids on my team) see him, the first thought that will go through my mind is "that guy is a cheater."
This story is a classic case of a conflict of interests where responsibilities should be segregated. The person keeping the score shouldn't be one of the coaches! But the situation was unavoidable because everyone is busy and there are just not enough extra non-biased folks to keep the score and time.
This lack of resources leading to conflicts of interest is a common situation in AP.
In AP, there are many conflicting duties which should always be segregated:
-
the person entering the invoice should not approve the invoice
-
the person who sets up a vendor should not enter the invoice into the ERP system
-
the person who approves the invoice should not audit that same invoice
-
etc.
There are many AP examples where duties should be segregated. The problem is that most finance departments constantly have pressure to do more with less. But to follow segregation of duties to the letter, you need enough staff which isn't always a luxury - especially in these economic conditions.
As I wrote in a previous blog post, here is where AP automation can help:
"With workflow software, you should have complete visibility into the AP process as the invoice transitions from one step to the next ... the AP system should track all changes maintaining a comprehensive audit trail of what was performed and by whom for all prior steps.
With workflow, limited headcount can still allow for segregated duties since segregation can be enforced at the transaction level instead of the job role level. Employees can still be cross trained and allowed to perform multiple functions as long as they don't perform conflicting duties on the same transaction. For example, an AP Specialist could both enter invoices and also setup suppliers as long as there is no conflict on each and every transaction.
This transaction-level segregation can be enforced by the workflow software which allows you to move away from restrictive job role controls ... rather than limiting what functions employees can carry out as part of their jobs, this approach allows enterprises to boost productivity while mitigating the business risks."
With fraud rising (see Managing Risk blog entry), transaction-level segregation is a great way to catch cheaters. In fact, it is probably THE best way to prevent cheating in AP that could cost the company significant money.
-Rakesh Shukla
@rakesh170
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Posted by Rakesh Shukla on Thu, Jul 30, 2009 @ 12:46 PM
12 months or so ago when I was approached to do an AP Blog for 170 Systems, my initial reaction was, "Who would want to read a Blog about AP???" After all, what could be said in a blog that is not already being said in newsletters, webinars, e-mail alerts and updates, etc.?
But then we realized that a blog allows us to take a fresh approach (and a few risks) highlighting key AP issues in a fun, creative and more personal way. The blog takes some very different perspectives on critical AP matters ... and is anything but boring -- at least according to the feedback we have received.
To my pleasant surprise, our thought-provoking posts have generated thousands and thousands of visits. To date, here are the 10 most popular:
- A Cell Phone for an 11-year-old?
- What is the NFL''s 2nd Highest-Paid Position? The Immensely Important Role of Accounts Payable
- The Best Excuse Ever ... Babysitting Invoice Approvals
- A plague o'' both your houses! The Ancient Feud of AP vs. Procurement
- A Tale of 2 Grocery Lines ... Understanding AP Bottlenecks
- The #1 Accounts Payable Headache is ...
- Segregation of AP Duties, What''s the Best Approach?
- Lies, Damn Lies and Stupid AP Metrics
- How to Earn 37% on AP Invoice Discounts ... Despite the Lowest Interest Rates Ever ...
- 5 Reasons E-Invoicing & Supplier Portals Have Failed
Please let me know what you think by posting a comment.
-Rakesh Shukla
@rakesh170
Posted by Steve Wilcox on Wed, Jul 22, 2009 @ 02:51 PM
In my last blog post, I explored how the current liquidity risk is real. Gone are the days when companies could tap cheap and limitless liquidity via issuance of commercial paper, notes or bonds - or turn to banks to take advantage of inexpensive and easy-to-get loans and credit lines.
The days of easy money are over.
The current liquidity squeeze caused by tight-fisted bankers and shell-shocked markets has elevated the management of liquidity risk to a top financial priority. In particular, making optimal use of internal liquidity through working capital improvements has catapulted in strategic value.
BUT ... maximizing internal liquidity is dependent on accurate cash forecasting.
And obviously, cash forecasting depends on visibility into ALL financial processes that affect corporate cash -- including Accounts Payable.
Understanding the current cash position and having visibility into future cash flows - both in and out - is critical for accurate cash flow forecasting and avoiding unpleasant surprises. If forecasting is hampered by poor visibility due to outdated processes and procedures, the company runs the material risk of a liquidity squeeze.
When it comes to cash forecasting, AP can really help or really hurt. Let me explain.
In manual, paper-based AP departments, visibility is a critical issue. The bottomline is that in overworked AP departments, paper invoices get lost on and in desks.
Untracked invoices sent to field managers are also a major visibility problem.
Shown above is the typical AP process, where invoices are sent to the field offices first for approval. These pre-approved invoices are then sent to AP where they are entered into the ERP system. This process has almost zero visibility on the front end. Invoices can sit on a manager's desk for days, if not weeks.
A huge problem with this "pre-approved" process is liability recognition. In AP departments that are chronically backed up at the end of accounting periods, the company runs the risk of not recognizing all or a material amount of its liabilities. Incomplete accruals may not only understate expenses and thus overstate income but also hamper cash forecasting.
Here's a much, much better process:
Notice that invoices are captured up-front and then routed for coding, hold resolution and approval.
To enable immediate visibility, Invoices are sent directly to the AP department instead of the field. As you can see in the first step of the process depicted above, invoices are captured immediately which allows earlier recording of liabilities, more accurate visibility into AP accruals and thus better cash forecasting.
Notice also that a robust AP automation solution will capture ALL invoice types regardless of source or format.
Capturing all invoices up-front allows you to generate high-level reports of outstanding invoices (i.e. invoice which have been entered into the system but not paid) which is particularly useful for cash forecasting and at month-end or period-end when you are trying to answer critical questions such as "Before I close the books, do I have some liabilities out there that have not been accounted for?" "How would I find out this information?" "What's still out there that has not hit my General Ledger yet?"
Summary
Centralized vs. Decentralized invoice receipt is a no-brainer. With the liquidity squeeze in full swing, it's critical that finance and treasury have a timely and accurate view into future cash outlays. It's hard to manage cash if you don't know what you owe.
-Rakesh Shukla
TwitterID: @rakesh170
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Posted by Steve Wilcox on Fri, Jul 17, 2009 @ 10:42 AM
There is a liquidity squeeze brewing.
Banks just don't want to lend.
Maintaining access to capital -- short and long term loans, revolving lines of credit, etc -- has become costlier and more difficult to come by as lenders have become much more cautious and stingier. The length and size of debt commitments are shrinking while costs are rising.
Higher capital requirements have made banks less willing to lend. In fact, banks are exacerbating the liquidity crisis by pulling in loans for borrowers who have defaulted on covenants ... and as earnings weaken, more and more companies are violating loan covenants. Banks are using these covenant violations to reprice debt packages. The harsh reality is that as more covenants get tripped, companies are being forced to renegotiate terms and those terms are unfavorable. Debt covenants are more stringent, terms shorter, interest rates higher, collateral requirements higher and banking fees higher.
Here is a graph showing the spike in covenant amendments:
The bottomline is that you don't want to be in default of a covenant as banks are going to extract more than a pound of flesh in exchange for continued access to that credit.
You also want to have visibility if a covenant is close to being tripped so that you can take proactive measures. If you are not in a position to fund operating expenses through working capital improvements alone, maintaining access to credit is a critical issue.
How does AP fit into this picture?
On the margin, AP may be able to make a difference on whether a loan covenant is tripped or not.
What is a Covenant ?
Briefly, a covenant is a condition that the borrower must comply with in order to maintain a loan or line of credit. If the borrower violates the condition, the loan can be considered in default and the lender has the right to demand payment (usually in full).
Obviously, banks add covenants to debt agreements to maintain loan quality, ensure the company has adequate cash flow to repay and keep an up-to-date picture of the borrower's financial health.
Common covenants include maintaining certain insurance policies (e.g. hazard, key-man life), submission of financial statements on a monthly, quarterly or yearly basis, and minimum financial ratios.
Most covenant violations are related to financial ratios falling below minimum thresholds. Financial ratios measure many things (some are very arcane!) but typically include:
- Minimum quick and current ratios (liquidity)
- Minimum Return on Assets and Return on Equity ratios (profitability)
- Minimum equity, minimum working capital and maximum debt to worth ratios(leverage)
How can AP make a Difference?
AP can definitely make a difference if a company is close to violating a covenant. Let's work through a couple of examples.
A typical liquidity ratio is the current ratio. The current ratio is an indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.
| Current Assets |
= Current Ratio |
 |
| Current Liabilities |
If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations. For example, if ABC Company's total current assets are $10,000,000, and its total current liabilities are $5,000,000, then its current ratio would be $10,000,000 divided by $5,000,000, which is equal to 2. ABC Company would generally be considered to be in good short-term financial standing.
So how can AP help here? If you have confidence in your ability to pay bills quickly to take discounts you can reduce your current liabilities to improve the ratio. Conversely, if you are late paying bills with late payment penalties, your current liabilities will increase which will decrease the ratio (make it worse).
Another typical ratio is Return on Assets (ROA).
| Net Profit after Taxes |
= Return on Assets (ROA) |
|
| Total Assets |
ROA is an important gauge of a company's profitability. It provides insight into how efficiently a company is being run by management and their ability to generate profits from the assets available to the company.
Anything a company can do to reduce costs within AP goes directly to the bottom line, improving profitability and thus positively affecting the ROA ratio. In addition to the obvious productivity benefits, automating AP processes can also reduce operational costs:
- Storage: Less paper means reduced storage costs and the ability to manage storage and archiving requirements. Less storage also means more efficient use of office space.
- Office supplies: Reduced requirements for file cabinets, file folders etc.
- Document transport: Average two thirds reduction in annual shipping and postage costs
- Disaster recovery: Disaster and business continuity processes are simplified and less risky
- Auditing: A single, automated process is easier to audit and has lower internal and external (e.g. SOX) audit costs. In addition, audit documentation requests take less time as these requests can be handled in a self-service fashion.
In summary, we are in the midst of a liquidity crises. Existing access to capital should be preserved and the key here is NOT to violate covenants. For certain covenants, automating AP can provide the visibility and make the difference between whether a loan is in default or not. In this environment where cash is king, that is a huge strategic benefit.
-Rakesh Shukla
@rakesh170
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