Improving short-term liquidity and minimizing long-term risk has always been on the finance agenda, but the arrival of COVID-19 had added urgency to both. These days, every business needs as much cash-on-hand as possible. But how can you maximize working capital quickly?
Even in normal times, practical challenges get in the way: budget limitations, competing objectives, lack of buy-in. What if you could make recovery audits self-funding? You’d be cutting through administrative complexities to bring more value to the bottom line — without a big outlay on auditors.
In this blog, we’ll look at how to get around the challenges and achieve working capital acceleration (WCA) across the source-to-pay (S2P) spectrum.
Three Pillars of WCA
To succeed in a disrupted environment, finance teams need to consider all of their untapped potential sources of value and look at new ways of operating so they can adapt.
Many companies are unknowingly sitting on synergies that can add greater value in a shorter timeframe. There are three ways to uncover them:
1. Review Accounts Payable Transactions
Every business processes from thousands to millions of transactions every year, and inevitably some payments are erroneous or done in error. Analysis from recent PRGX client engagements points to an error rate of between 0.02% and 0.08% of spend.
By conducting a detailed review of those transactions, finance teams can identify claims that bring cash back to the business. That means a short-term uplift to the bottom line, and the review itself will uncover insights that highlight where processes can be improved. The hidden value of recovery audits now lies as much in data and analytics as it does in recovered cash.
2. Optimise Days Payable Outstanding (DPO)
All the data aggregated in the accounts payable review will enable you to see when you are actually paying your suppliers vs the terms agreed in their contracts.
This can enable you to do to two things: identify unrealized discounts that you should have applied, and use modelling to optimize terms and improve working capital for groups of suppliers or across the whole supplier base.
Often, suppliers are being paid too early, essentially lending them interest-free money, in some cases for half a month. Managing the DPO can help businesses recapture working capital.
3. Implement Contract Compliance Programs
The data delivered by the accounts payable review will provide the intelligence to decide which suppliers and contracts should be prioritized for review.
The purpose of each review is to ensure compliance with agreed terms and ensure that you are getting full value from the operation of every contract. It involves a deep dive into whether suppliers are charging, rebating, and discounting in line with the terms procurement teams likely devoted significant time to negotiate.
Any exercise in contract compliance can require the involvement of both procurement and finance, so having executive buy-in is a critical success factor.
Data is the Accelerator
Data collected during an accounts payable review can enable businesses to identify new ways to recoup losses, reduce costs, and operate more efficiently.
Key benefits include:
- Generating more working capital and cash on hand in the shortest possible timeframe
- Assessing the diligence of the current payment process and evaluate vendor compliance with contract terms
- Mitigating risks and reducing leakage in the disbursement processes with optimized supplier contracts
- Establishing a sustainable recovery audit program
- Leveraging auditor expertise and knowledge of best practice to create a world-class compliance program
But You Need People Too
As important as data is, you can’t rely on automated systems alone. The insight and experience skilled consultants can provide has to be part of the mix.
Improving access to working capital requires careful management of vendor relationships. Because it’s as much about people as it is numbers. The wrong approach can look like a witch hunt, so stakeholder alignment is crucial.
You need a provider with extensive experience in launching large complex programs where results are required quickly without disrupting critical business activities.
At PRGX, we have more than five decades of experience and expertise to draw from. That allows us to reach wider, dig deeper and act faster for our clients. By finding synergies across the S2P cycle, we help put businesses on the fastest path to value.
Almost every Fortune 500 company relies on recovery audits as standard practice. Integrate them into your monthly or quarterly financial processes, and let PRGX help you maximize working capital and cash-on-hand throughout the financial year.
Want to learn more?
Download the Embedding Working Capital Acceleration In S2P white paper will provide a roadmap around the challenges and help you achieve working capital acceleration across the source-to-pay spectrum.