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 If forecasting is hampered by poor visibility due to outdated processes and procedures, the company runs the material risk of a liquidity squeeze.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
Related Blog Posts: