Financial Supply Chain

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Untapped Potential: Purchase to Pay ‘Purchase to pay’ refers to the series of processes that take place between the issue of a purchase order, through to receiving, approving and reconciling an invoice, and approving and making payment to the supplier. The Editor looks at how far we’ve really gone in achieving an efficient purchase-to-pay cycle and where we are going from here.

Untapped Potential: Purchase to Pay

by Helen Sanders, Editor

‘Purchase to pay’ is a phrase that has littered the trade press for a number of years now, referring to the series of processes that take place between the issue of a purchase order, through to receiving, approving and reconciling an invoice, and approving and making payment to the supplier. In many cases, companies have made significant progress in enhancing one or more of these elements by optimising and centralising processes, streamlining connectivity and rationalising bank relationships and accounts.

Increasingly too, companies are recognising that optimising these processes is not enough to achieve complete operational and financial efficiency, and are now seeking to integrate the purchase-to-pay cycle with order-to-cash, connecting payables and receivables in order to optimise liquidity and working capital as part of an integrated financial supply chain. At least, that’s the theory. This article looks at how far we’ve really gone in achieving an efficient purchase-to-pay cycle and where we are going from here.

The business case for payments optimisation

In some respects, there would appear to be few business drivers for investing in payments processing. After all, the longer cash resides in a company’s bank accounts the better. In addition, a company’s survival is rarely going to depend on whether a supplier payment is made on time, whereas the same cannot be said for a collection. The reality, however, is that an efficient payment process can cut costs significantly, reduce the risk of costly errors or fraud, and protect the company’s reputation. When part of an efficient cash management structure, bank relationships and accounts can be rationalised and the liquidity and working capital management strategy enhanced. The more extensively that processes are integrated, from the point of a purchase order being raised, through to the reconciliation of the payment by the supplier, the more significant the advantages; however, there are a variety of challenges to contend with.

Payment factories and shared service centres

A typical first step towards optimising payments is concentrating payments into a centralised payment factory or shared service centre.

A typical first step towards optimising payments is concentrating payments into a centralised payment factory or shared service centre (SSC) to standardise processes and leverage a single technology platform. In many cases, these use a ‘payments on behalf of’ model so that external payments can be channelled through a single account, supported by an in-house bank for intercompany transfers and account posting. The most significant exception to this is Asia, as Victor Penna, Head of Regional Solutions & Advisory Team, Asia Pacific, J.P. Morgan Treasury Services outlines,

“As yet, we have not seen a significant trend towards a combined payments and in-house banking model in Asia, unlike Europe for example, but this is starting to change. One of the challenges that companies face in implementing ‘payment on behalf of’ arrangements is Asia’s diversity and the differing regulatory environments across the region.”

The payments factory/in-house banking model is by no means new, particularly amongst large multinationals, many of which centralised payments either in-country or regionally some years ago. However, as Willem Dokkum, Global Head of Sales, Payments and Cash Management, ING explains,

“We are seeing a clear increase in the number of companies that are implementing payment factories, not only amongst large corporates but medium-sized companies too. These companies are seeking to achieve enhanced efficiency and control over processes, and control and visibility over cash. Technology is a major enabler for these objectives, with a wide variety of treasury and payment systems available that can help companies achieve their goals in this area at a reasonable price.”

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