AR Needs to Communicate With AP—Inside and Outside of the Organization
Collaborating with key stakeholders—both inside and outside the organization—is beneficial when planning improvement activities, designing new processes and procedures, implementing new technology, and complying with existing laws.
One key stakeholder is your organization’s AP operation. There are a number of areas in which an internal AR/AP dialogue can result in valuable learning on both sides of the equation:
What to do when your customer is also a supplier
In certain cases, your company may be both buying from and selling to a particular organization.
“When working with companies that are both customers and suppliers, it can become problematic when organizations do not routinely monitor their receivables versus their payables,” says IOFM Consultant and author John Salek.
“I remember one instance where AP was paying a supplier/customer company on time—while on the AR side, the supplier/customer was paying exceedingly late. Even when this issue came to light, the AP department was reluctant to offset the amounts to be paid because they said:
- It made accounting for the transactions more difficult for their customer/supplier so they were reluctant to do so; and
- It made accounting for the transactions more difficult for AP.”
“In such a case, some collaboration between AR and AP was warranted. For example, the AR Credit Department should have been involved in assessing the risk of the customer defaulting on payments because of a potentially weak financial condition,” he adds.
How does the invoice affect payment?
Accounts receivable and accounts payable share a common interest in making sure that an invoice gets paid as quickly and seamlessly as possible. There are numerous opportunities for things to go wrong in the process, and it’s important that an invoice be properly prepared—so that its mission is accomplished. In an AP/AR discussion, AP can speak to what facilitates prompt payment. AR can speak to the challenges of slow payment and explain the steps it takes in the collection process.
Why to advocate for automation
Both AR and AP professionals report in IOFM studies that automation is one of their top three goals. Yet both departments are often challenged by budget constraints and a lack of corporate investment. This means that AR and AP departments are often left with receivables and payment processing systems that are heavily manual.
“Generally, when companies work toward automating either the O2C process or the P2P process, solutions involve the following three categories,” says Salek:
- The inflow of information and documents (which are digitized via scanning). Examples: purchase orders, payment information.
- The execution of processes. Examples: routing and tracking of disputes via workflow, receiving or paying via credit card, invoice generation, reporting
- The delivery of information and documents. Examples: invoices, statements of account
AR and AP professionals can benefit by discussing how available automation can streamline their processes, eliminate paper, create efficiencies, and cut costs. This collaboration can help them build the case they need to “sell” automation to senior management.
“While the exact functionality is different for AR and AP, there is a commonality in the types of technology implemented by both AR and AP,” says Salek. And the goals are very similar:
- Accelerated cash flow; (Reduced days sales outstanding (DSO) and increased days payable outstanding (DPO);
- Elimination of printing and postage costs associated with paper-based processing;
- Streamlined management of invoice disputes;
- Reduced number of phone calls regarding invoice and payment status;
- Improved service;
- Savings from process efficiency gains.
“While AR and AP are on different sides of the business transaction process, there is much to be learned by discussing how available technologies can save time and money,” says Salek.
How AR and AP help senior management with cash flow issues
While performing their daily operations, the accounts receivable and accounts payable departments have the opportunity to glean information about the business’s customers and vendors that can keep top leadership apprised of anything that may affect the business’s cash flow.
For instance, if a good customer suddenly starts making late payments, that’s a solid indicator that something has changed with the company. It might be financial trouble, but it might also be that a new employee is confused or underperforming. Only by checking it out can the AR manager know what the problem is and how to advise management how to deal with it.
Also, in regard to cash flow, keeping aware of the business’s long-term goals and medium- and short-term plans—such as hiring new staff, purchasing equipment, or leasing additional space—can enable the AP and AR departments to make informed recommendations to safeguard the health of the firm.
For example, by monitoring cash flow carefully, managers can suggest when to hire temps instead of permanent staff, when to lease rather than buy additional equipment, or when to conserve space rather than rent more. By keeping aware of the business’s changing needs, its fluctuations in cash flow, and trends affecting customers and suppliers, AP and AR managers can enhance their value to the company.
What AR and AP can learn about ensuring compliance with the laws
Being a good internal business partner means staying apprised of the laws and regulations that pertain to work in both AR and AP.
- Both AR and AP must make sure that no one on the OFAC list ends up in the customer or vendor master file. The OFAC law prohibits companies from transferring money or materials to or from anyone on the OFAC lists.
- AR and AP also need to stay up to date on laws around taxes, such as sales tax. Tax laws vary from state to state. It’s a lot to keep track of.
- Escheatment is another area AR and AP need to stay on top of. That means knowing all the regulations around escheatment, or unclaimed property.
Think like a team player
“The work done in the accounts receivable department has a major impact on other functional areas within an organization because it affects, enhances, and supports the work in other departments,” says Salek. “By becoming a business partner to other mission-critical areas within a company, AR can have an impact on lowering operating costs and help other key stakeholders do their jobs more effectively.”