Posted by Steve Wilcox on Thu, Dec 04, 2008 @ 12:11 PM
Check out this amazing chart of the 13 week T-Bill Treasury rate since 1960:
3 month T-bills at ZERO? Are you kidding me???
The yields are at never before imagined levels ... all-time record lows across the entire yield curve:
... 2-year notes at almost a jaw-dropping 3/4%
... 5-year notes at an amazingly low 1.5%
... willing to lock up your money for 30-years at a miniscule 3.0%?
At these yields, you are basically donating your money to the Treasury rather than lending it. But what if you could earn 37% in this low interest environment?
How?
By taking your AP invoice discounts.
If your vendor offers you a discount of 2% if you pay within 10 days (2/10 net 30), you'd save $2 on a $100 order ... if you simply pay 20 days earlier than usual.
To figure out how this translates into an annual interest rate, use this formula:
Discounted amount /(Discounted price/100) X 360/N =
Effective annual interest rate
where 360 = days in the fiscal year, and N = the number of days between the discount date and the final payment deadline.
So, in the "2/10 Net 30" case, 2/(98/100) X 360/20 = 36.7%.
37%!!!! In an economic climate where t-bills are earning 0.05%, 37% seems like a no-brainer.
Even if the discount terms are slightly different, the yields will blow away anything you can safely earn in the bank. For reference, here's a list of effective annual interest rates for some common discount terms, as calculated by the American Institute of Professional Bookkeepers:
- 1/10 net 30 = 18.2%
- 1/10 net 45 = 10.4%
- 1/10 net 60 = 7.3%
- 2/10 net 30 = 36.7%
- 2/10 net 60 = 14.7%
- 2/20 net 90 = 10.5%
- 3/10 net 30 = 55.7%
- 3/10 net 60 = 22.3%
- 3/20 net 90 = 15.9%
Now, none of this is possible if your AP cycle times are too long or if you don't have visibility into AP discounts that are coming due ... common problems with paper-based AP processes.
This is where a robust AP Automation solution that tracks upcoming discounts can provide some real value. By shortening invoice processing cycle times and knowing which discounts are about to be lost if invoices aren't paid promptly, you can take those negotiated discounts and save your company a lot of money.
Now, there is one twist to consider -- the need to increase working capital. AP can increase working capital by stretching payment terms and foregoing the discount. In general, it's difficult to justify not grabbing that 37% annual discount yield but there are some working capital tradeoffs. I will have more to say on this topic in my next blog entry.
-Rakesh Shukla
@rakesh170
Related Blog Posts:
Posted by Steve Wilcox on Wed, Nov 19, 2008 @ 11:04 AM
Ok, I'll admit that the functional requirements for a critical financial function such as AP dwarf the functional requirements for an iPod or a search engine but the point is clear ... ERP AP products are complex. The installation, maintenance and upgrades are complex. The user interface for AP products is especially complex.
And yet, AP touches so many other business functions and business users outside of AP from line-of-business users that need to approve & code invoices, to procurement that needs to help resolve PO holds, to finance managers who want to track key metrics, to suppliers who want status information on their payments. The dilemma is that you just can't expect these users to sit down and figure out how to navigate complex ERP AP screens. The learning curve is just too steep. If you want the most efficient and accurate AP process, you NEED to seamlessly include these users.
And this is one of the major flaws of AP Automation products including imaging and workflow products. For non-AP users that need to approve invoices, help resolve PO holds, provide account coding information for NON-PO invoices, track & manage metrics and trends, retrieve payment status information in a self-service fashion etc. ... these users need something simple ... really simple.
A good AP Automation solution should provide a simple, intuitive, web-based interface for approvals, coding & hold resolution, an intuitive "at-a-glance" AP dashboard for managing day-to-day operations and a simple supplier portal for payment status inquiries.
When you see an approval interface, an AP dashboard or a supplier portal ... ask yourself this critical question:
How simple is this to learn and use?
-Rakesh Shukla
@rakesh170
Related White Papers
Related Blog Posts