This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2009; for more information about IOMA publications visit www.ioma.com

 

AP Manager Gets Bonus: The AP manager and the controller plan to extend terms even further if necessary. They agreed that even though they are matching industry standards, there is no reason why they should be paying faster than their major competitors. The controller also put the AP manager in for a year-end bonus — something that an AP manager at the company had never received before.

Virtually every AP department is getting pressured to help its company enhance cash flow. Business is down, bank borrowing is tight, and corporate balance sheets are a mess. Fortunately, AP is in a position to come to the rescue. Here is one AP manager’s story.

 

Facing the Problem

The AP manager at a company whose name we cannot reveal (but whose situation is all too common today) got a call from her controller to discuss how AP could contribute to the cash-flow cause. The controller stated that the situation would become more serious by the end of the year because of credit issues with its banks. Lines of credit were temporarily drying up, so the company would not be able to draw on them as much for ongoing business needs. Plus, a downturn in business was affecting cash inflows from customers.

The AP manager considered alternative courses of action. She also discussed the issue with several colleagues at other companies that had faced similar problems to see what worked—and what did not.
After talking to colleagues and thinking about the matter, the AP manager made the following suggestions: (1) Stretch payment terms based on comparable data, (2) reduce the number of check runs, and (3) ask vendors to be patient during the tough period.

Of course, each of these suggestions meant quite a bit of work and research.

 

AP’s cash-flow rescue plan in a nutshell:

1. Discuss problem with AP colleagues at other companies
2. Calculate AP-to-inventory percentage
3. Figure out AP payout days
4. Compare data to information from your colleagues
5. Compare data to industry standards
6. Devise a target goal for both AP payout days and AP-to-inventory percentage
7. Reduce the number of check runs
8. Ask vendors to be patient
9. Notify vendors of the plan
10. Monitor and report on progress

 

Stretching Terms

The AP manager began by culling data for both AP payout days and the percentage of AP to inventory. She got this data on her company’s competitors that were publicly traded companies from their 10-Ks and 10-Qs filings from the SEC and its EDGAR database at www.sec.gov/edgar.shtml.

She also obtained the same information from her industry trade group. Not all industries provide such information, but if they do, it’s invaluable. When she compared the data for her peers and industry, she was amazed to discover that her company was paying a week faster than the industry and anywhere from three to 16 days faster than its competitors.

She recommended that the company match the industry terms. The controller agreed and asked her to prepare a simple analysis of the information so he could take it to senior management.

 

Reduce Check Runs

The AP department ran checks two times a week. By talking to her peers, the AP manager discovered that this was more frequent than virtually every company of similar size.

One colleague confided that his company had gone from three runs per week to two per month with very little complaint from vendors. He felt the key to the success of this plan was the fact that the vendors were all told this up front. He did concede that the number of rush checks rose slightly, but not enough to detract from the huge amount of time saved by reducing the check runs. He also told her that his AP staff members took a very hard line with offenders looking for rush checks during this period.

The AP manager recommended the same plan to her controller: two check runs per month, with notification to both the vendors and the rest of the company.

 

Vendor Leniency

While the two measures explained above would clearly have a positive impact on the company’s cash flow, it did not look like the company would make up for the shortfall anticipated when the lines of credit from the banks got very tight. Half in jest, the AP manager suggested that the company ask its vendors for a little tolerance during this tough period. "What else can we do?" she asked. The controller agreed.

The plan was presented to senior management along with suggestions from other departments. Some of the suggestions were accepted and others rejected, but all of AP’s ideas received a green light.

 

Idea in Action

A letter to the vendors was prepared for the CEO’s signature. The AP manager’s worksheet that showed the payment terms at publicly traded competitors along with the industry data was included. In the letter, the company stated that it would:

• issue checks only twice a month;
• match the industry standards for AP payout days; and
• ask permission to defer payments on all invoices due in November until Dec. 15 and that the company be allowed to take the usual prompt pay discount.

After the letter was mailed, AP waited for the deluge of protests—but only a few griped, and they eventually agreed.

###

• Back to Accounts Payable Articles Index