Financial operations are in the spotlight — really and truly — as early economic recovery unfolds. This area has been getting attention from senior management teams that are adjusting their sights on the following issues:

• As our demand picks up, how will our cash flow patterns change?


• How clear is our line of sight on impending commitments of cash?


• Will key suppliers have the working capital they’ll need to properly ramp up?


• How can we ramp up ourselves without starving our suppliers for cash?


• How well did key customers weather the recession?


• How much trade credit risk can we comfortably carry?


• Can we take more preset payment discounts and save on direct costs?

That last bullet is one of my favorites. According to data gathered by my firm, APQC, a nonprofit business research organization, a shocking number of large companies fail to act opportunistically when it comes to capturing preset early payment discounts. That’s a shame — especially when CFOs and controllers say they’ll keep looking under every rock for another penny of cost savings or another FTE to chop.

The hypothetical math speaks for itself. Over the course of 12 months, by failing to avail yourself of a 2 percent discount off the invoice amount (you decline to pay early in 10 days), you are throwing away a chance to reduce the cost of materials or components significantly.

Granted, the maneuver only makes sense for cash-flow-rich companies. But, hold on a minute! Many big companies hoarded cash like crazy during the recession. This begs the question: Why is the Accounts Payable function not more on the ball?

There are three explanations. First, the typical large-company procure-to-pay process is so clogged with paper that the good people in A/P cannot process invoices, get them approved, and disburse payments in under 10 days.

Second, the good people in A/P have been trained, and trained again, to never pay a bill a moment sooner than necessary. Talk to this group about early payment discounts and you see fear flashing across their eyes: “You want me to do what? Go tell the CFO we should accelerate payments? You’re joking!”

Finally, our research shows that close to 2/3 of CFOs and treasurers don’t have what you’d call “high confidence” in the precision of their cash flow forecasts. They wouldn’t dare drain their cash reservoirs. What if a large, unexpected cash commitment came up that couldn’t be easily met? A career black mark!

The picture may soon be changing, however. A survey that we just completed shows that, during the recent slump, the majority of large manufacturing firms, 54 percent moved to capture a higher volume of early payment discounts. By contrast, only 35 percent of large service-sector companies made a conscious effort to do so.

In future postings, I’ll share more of our research on what goes on behind the scenes in financial operations — and how smart companies are looking to make financial management processes more effective, not just more efficient.

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