Accounts payable (AP) and accounts receivable (AR) are often viewed as transactional back-office functions. However, they can be key to the success of the treasury and cash management duties.
AP and AR directly impact a company’s cash flow, liquidity, and overall financial health. By optimizing these departments, treasury and cash management professionals can significantly enhance their ability to manage risk, improve operational efficiency, and drive strategic business growth.
Treasury relies on accurate and timely information from AP and AR to forecast cash flows, manage liquidity, and make informed decisions. Efficient AR processes accelerate cash inflows, improving a company’s ability to meet short-term obligations and invest in growth opportunities. And well-managed AP processes can optimize payment terms, preserve cash, and mitigate supply chain risks.
To maximize the strategic potential of AP and AR, treasury and cash management professionals must move these functions beyond traditional transactional management. By adopting a holistic, data-driven approach to AP and AR, treasury can unlock significant value that drives sustained growth.
The impact of inefficient AP and AR on Treasury and Cash Management
Inefficient AP and AR processes can have a big impact on treasury and cash management.
- Cash forecasting challenges. Inaccurate or delayed data from AP can lead to unreliable cash flow forecasts. This can result in insufficient funds to meet obligations.
- Increased costs. Manual processes and human errors in AP can contribute to duplicate payments, late fees, and other operational costs that negatively impact cash flow.
- Supply chain disruptions. AP inefficiencies can result in delayed payments to suppliers that potentially impact a buyer’s supply chain, leading to production delays, and increased costs.
- Compliance risks. Manual processes, poor controls, and lack of visibility into AP workflows can increase the risk of fraud and non-compliance with tax and regulatory requirements.
- Slow collections. AR inefficiencies can lead to delayed or missed payments from customers, impacting cash flow and hindering the company’s ability to meet its financial obligations.
- Bad debt. Poor credit risk management, weak deductions management, and inefficient collections can result in increased bad debt expenses, negatively impacting profitability.
- Reduced sales. Delayed payments and disputes can strain customer relationships, leading to lost sales and decreased revenue. AR inefficiencies can also impact the customer experience.
- Working capital strain. Friction in the AR process can tie up significant amounts of working capital, limiting a company’s ability to invest in growth and operations.
To effectively manage treasury and cash flow, it is imperative to address inefficiencies in AP and AR.
How to Elevate Treasury Through AP and AR Modernization
To fully realize the strategic potential of the AP and AR functions on treasury and cash management, organizations must adopt a holistic approach that focuses on the following key areas.
- Alignment with corporate objectives. AP and AR should be integral to the broader corporate strategy, not isolated functions. By understanding the organization’s strategic goals, treasury and cash management can align AP and AR operations to support these objectives. For instance, if the company is focused on growth, accelerating cash inflows through efficient AR management becomes paramount. Conversely, if preserving cash is a priority, extending payment terms through strategic AP management can be beneficial.
- Data-driven decision making. Harnessing the power of data is essential for optimizing AP and AR. Advanced analytics can provide invaluable insights into payment patterns, customer behavior, and supplier performance. By analyzing this information, treasury and cash management professionals can identify opportunities to improve collection efforts, negotiate better payment terms, and optimize working capital. Predictive analytics can forecast cash flows more accurately, enabling proactive liquidity management and risk mitigation.
- Technology adoption. Embracing technology is crucial for modernizing AP and AR. Automation and artificial intelligence (AI)-powered solutions can streamline processes, reduce errors, and enhance efficiency, whether it’s invoice processing, payment matching, or collections. And robotic process automation (RPA) can handle repetitive tasks. All this frees up AP and AR staff to focus on data analysis and other strategic initiatives that support the treasury and cash management function. With automated AP and AR processes, treasury can gain greater visibility into cash flows, improve decision-making, and streamline compliance.
- Supply chain collaboration. Building strong relationships with suppliers is essential for optimizing cash flow and mitigating supply chain risks. By improving collaboration with suppliers through AP automation, treasury can potentially negotiate better payment terms, generate more opportunities to capture early payment discounts, and improve supply chain visibility and contract compliance. This can lead to cost savings and improved cash flow.
- Risk management. Effective risk management is paramount to treasury and cash management. Automating AP and AR with user access permissions, audit logging, data encryption and other built-in controls and implementing robust credit evaluation and monitoring processes can help minimize bad debt losses and payment fraud risk.
Focusing on these areas can transform AP and AR from transactional functions into powerful drivers of treasury performance. A holistic, data-driven approach to AP and AR, coupled with technological advancements and strong supplier relationships, will help treasury and cash management professionals optimize cash flow, mitigate compliance and fraud risks, and drive sustained growth.
Transforming AP and AR from transactional back-office functions to strategic business partners is essential for the success of modern treasury and cash management organizations. By focusing on these key areas, treasury teams can unlock the full potential of AP and AR, contributing significantly to the overall financial health and competitiveness of the business.
