Making The Perfect B2B Payment

When organizations take in and pay out purchase orders and invoices, what does the perfect payment look like? Bob Sneed, vice president of corporate payments for the payment processing and information management service company WEX, said in a recent interview with Karen Webster that the profile will be different for every organization.

Sneed said that efforts to manage corporate payments strategically will fall short until organizations can answer this question. Many, however, are not even trying to do so. The majority of executives haven’t put in the time or effort to move away from manual payments processing and dive deeper into their financial supply chains to really optimize processes.

Indeed, Sneed said, many seem unwilling to do so. But manually processing invoices can represent around 60 percent of labor costs, noted Webster. Why wouldn’t organizations want to do that?

“They haven’t seen the financial gains to be significant enough,” Sneed theorized. “They’re focused on what they believe to be larger initiatives.”

Webster noted that it feels strange to think of payments processing as a strategy. Rather, she said, payments seem like a simple function: an employee pushes a button and the payment goes out.

Yet for many organizations, there’s no consistent method across the payments board, and before companies realize it, they’re not just dealing with a few terms and conditions but with dozens as they try to meet the demands of their suppliers.

For instance, getting payments in faster has become an industry holy grail, and most organizations will bend over backwards to do it if that’s what the supplier wants. But a strategic company asks what it can get out of accelerating payments at the supplier’s whim. Is the supplier willing to offer a discount for payments received in 45 days instead of 60? If so, the organization would be crazy not to leverage that.

But who’s responsible for finding out about those strategic benefits? There’s nothing in it for hourly employees to take a closer look at the terms and no penalty if they don’t. And CFOs are busier than ever, said Sneed, with things like new and stricter compliance and regulation tasks putting more and more pressure on them.

“Taking the time to go down and do an analysis in the midst of the day-to-day work grind is not something that’s top of mind,” Sneed said. “But in these cases, with what it means to the bottom line of their organization, they can’t afford to let it go.”

That’s where it can be helpful to work with a consulting organization like WEX, said Sneed. WEX starts with an ‘Operational Overview’ to help establish a base line for the company. From that foundation, organizations can build a disciplined framework to ensure lowest-cost execution with maximum financial benefit based on their company’s unique set of needs.

5 Questions Every CFO Should Ask

After profiling the organization’s “perfect payment” – for example, online, on time, and garnering the maximum possible discount – Sneed said that executives should ask their organizations the following five questions.

First, how does the organization currently manage its procurement process?

Second, what can it do to automate the purchase order and invoice receipt and approval process?

Third, where can a commercial card program deliver sustainable value in the organization’s overall payments equation? For instance, are there certain types of payments where a commercial card solution makes sense, and if so, how can that be leveraged?

Fourth, what are the critical steps within the organization that will ensure its operational effectiveness to optimize payment execution?

Fifth and finally, how does the organization plan to benchmark against its concept of a “perfect payment?” Only by comparing the actual payment to the perfect one can executives understand whether they are meeting their payment efficiency goals, and if not, where they are falling short.

Charting The Course

CFOs know they need to talk about payments strategies, but what’s discussed at planning meetings and what’s executed in accounts payable often look completely different. Whatever strategy is decided at the top must be executed through a disciplined approach to be worth its salt, said Sneed, and there must be a team responsible for managing buyer-supplier relationships according to the strategy.

The first step should be to analyze the existing financial supply chain – how and when they receive and approve invoices, the set up for payment execution, and supplier details such as type, spend, invoice volume, payment method and settlement terms.

Then, an organization must know itself. Is working capital its main driver? If so, then discounts for faster payments may not be a priority. However, for others, optimizing discounts will be a key point of the strategy, alongside mitigating fraud and risk. Card programs often generate a knee-jerk reaction, but they don’t have to be expensive – just don’t let the issuer call all the shots.

For organizations that are still processing payments manually, Sneed recommends a balanced approach through the transition to electronic payments. Push manual payments out to 60 days, he says, and let suppliers know that the company is willing to accelerate those payments in an electronic format if suppliers will consider a discount.

A solid strategy not only optimizes funds, time and energy, said Webster; it also fuels visibility into the entire process and can help executives make key decisions early, rather than delaying until it’s difficult.