Making Accounts Payable Profitable

Accounts Payable is often thought of as just a cost center that needs to be controlled, and many finance organizations consider it a necessary evil. Historically, it’s true: Accounts Payable made sure invoices were entered into the books, approved, and paid. This does not have to happen today, and that mindset needs to change. The best way to do it is to stop the Accounts Payable organization from solely pushing paper and begin using the resources in a strategic fashion.

The first thing that needs to be asked is: What does management care about? Asking senior managers & CFOs who oversee AP will often provide one or more of these three metrics:

• Invoice cycle times
• AP employee productivity (i.e. invoices processed per team member)
• Percentage of invoices paid on time

The common thread between all three of these metrics is that they only show whether AP is worth the cost. They are important metrics, but they only show the cost of AP while neglecting to show the value.

The key to making Accounts Payable profitable is thinking strategically beyond the above metrics and identify areas the team can help the business beyond the tactical. Any report to an executive should include additional metrics that detail the amount of money the department has saved. Some key examples are:

• Identifying and stopping duplicate invoices or other fraud
• Negotiating and meeting early payment terms
• Persuading vendors to accept credit cards (that offer a rebate back to the business)

While the first one is important to any AP organization and will absolutely demonstrate value, using the latter two as the basis to perform an Accounts Payable transformation can elevate the role of AP from cost center to a potential profit center.

Imagine a company with $200,000,000 in invoice payments that spends $300,000 on an AP department. If they can demonstrate how they have negotiated 1% early payment discounts on $25m of spend and paid another $20m with a credit card that give a 1.5% rebate, that $400,000 AP department cost has earned the company $550,000.

A 1.8 ROI wouldn’t be considered great for a revenue generating department, but it allows AP to transform its role from a cost center to a department that can directly improve the bottom line.

Beyond considering the process to achieve this, the other key aspect is having clean, accurate data to report these Accounts Payable KPIs. Without that, executives will constantly question the validity of them. I've worked with clients previously who couldn't provide data for these revenue-generating numbers beyond shrugs and anecdotes. Getting them to accurately track these areas enabled them to report the numbers and confidently stand behind them.

Improving Accounts Payable will take some effort and require a shift in operating among all employees in the organization (Working from home is a great time for an Accounts Payable process transformation). If your organization runs almost entirely on paper, there will likely need to be some technology adoption (such as AP Automation) in order to manage it all. The end results though, can demonstrate that AP is more than just a cost of doing business.