In my last blog I stated that, “that in the past Accounts Payable (AP) and Accounts Receivable (AR) were rarely spoken about in the same breath”.
I find it fascinating as I think about the fact that AP and AR are now in separate silos with minimal communications. In most cases small companies start out with AR and AP being done by the same person. That person has all the information at their fingertips so they can make instant cash flow related decisions regarding collections and payments. This makes the financial departments in the small companies very nimble.
The AP and AR departments diverged as companies became larger and in the era when promotion led to a proliferation of middle managers supervising in the finance departments. This resulted in the establishment of more departments. This was the traditional style management in that era. The multiple department philosophy was justified on the basis of the complex management requirements associated with manual processes associated with paper transactions. The processes required a large amount of labor to track and capture transactions and it took even more labor to decipher the numbers to gather business intelligence to manage cash flow.
Technology now provides automation to process electronic transactions between buyer and seller to optimize cash flow and increase working capital. The technology also provides real time dispute management, automated cash application, dynamic discounting and dynamic 3rd party financing for the PO and AR process to improve working capital positions. This enables the two separate departments to be merged and become nimble again.
The challenge that needs to be resolved is to help CFO’s and controllers get develop the confidence in the technology to make the move to converge the AP and AR departments to regain the financial nimble again. This can be accomplished by pursuing automation with technology by taking one step at a time. A good example of this is outlined in the first few paragraphs of our United Legwear Company success story, which can be read here: United Legwear Company Success Story.