Striking the rightbalance is one ofthe greatest chal-

lenges in working cap-ital management.Overemphasizing onefactor in the equation,or underemphasizinganother, will almostinvariably create prob-lems—problems thatcan be avoided withthe right advice andguidance.

Overaccelerate the pace atwhich you force customers topay and they will feel abusedand look for an alternative sup-plier. Cut inventory to the pointwhere you’re failing to fulfillorders and you take just-in-timestock control to its logical nextstage: just-too-late. Extend thelength of time taken to pay sup-pliers to an unacceptable leveland the least they will do iscompensate for this by increas-ing prices. In a worst-case sce-nario, they will refuse to acceptyou as a customer. And they maygo out of business becauseyou’ve deprived them of thelifeblood that is cash.

The answer to the conun-drum is to OPTIMIZE the work-ing capital balance, extracting

the maximum value from eachof the three main components oftotal working capital—Purchaseto Pay (known at REL Consul-tancy Group as P2P or credi-tors), Customer to Cash (C2C ordebtors), and Forecast to Fulfill(F2F or inventory)—withoutdestroying goodwill, hinderingoperations, or damaging marketreputation.

The specific aim here is toconsider how modest improve-ments in the P2P process canfeed through quickly and dra-matically to the bottom line.Sustainable optimization willoften require a complete reviewand overhaul of the P2P processif the result is not to be a mereshort-term cosmetic enhance-ment of the balance sheet, ashappens with the traditional

approach to workingcapital managementstill taken by someconsultants.

A payable balanceis the result of a com-pany’s need or desireto buy a service, aproduct, or a commod-ity. Purchases can bedivided into direct pur-chases (goods and rawmaterials) or indirect

purchases (pens, stationery, andbuilding maintenance and infra-structure costs, for example).

At our consulting firm, wesubject to close scrutiny everystep of the process, from setting abudget to making payments. Theaim is twofold: (1) to improve thepurchasing process and reducethe cost of goods and services inboth the direct and indirect areasand (2) to optimize paymentterms and increase creditor dayswithout impacting upon the pricepaid to the supplier.

How does this strategicsourcing work? By reviewing andreorganizing processes and struc-tures on a client-by-client basis,with the aim of creating the idealpurchasing and accounts payablestructure for any single organiza-tion. With international clients,

Accounts payable is the Cinderella of the workingcapital world. While her more glamorous sisterfunctions demand the bulk of a company’s time andattention, accounts payable often lacks the careand attention it deserves. That’s a pity—becausethis Cinderella can account for about 60 percent ofa company’s turnover. And when she is dressed upto go to the ball, the results are immediate—andcan be simply stunning. © 2005 Wiley Periodicals, Inc.

Stephen Payne

Accounts Payable: Why Cinderella MustGo to the Ball

featu

reartic

le

33© 2005 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.20164

this might involve the creation ofa small global center of excel-lence, with individual purchasingresponsibilities spread around theworld, while a shared-servicecenter may be appropriate foraccounts payable.

The subdivisions that existwithin P2P mean that accountspayable is the Cinderella of theworking capital world. While itsflashier, more glamorous sistersdemand the bulk of a company’stime and attention, this integralpart of the P2P process oftenlacks the care and attention itdeserves.

This is a terrible pitybecause Cinderella can accountfor around 60 percent of a com-pany’s turnover, and when she isdressed up to go the ball, theresults are immediate and can besimply stunning.

Even a small improvementto the accounts payable elementof working capital and the costof purchases can deliver quickresults to the bottom line, oftenwell out of proportion to theamounts involved. These

improvements can be broadlyequivalent to a significant boostin a company’s sales.

For a company facing thereality of static or decliningsales, this can spell the differ-ence between collapse and sur-vival, by buying the time neededfor rethinking and restructuring.For a company managinggrowth, the return will be evenhealthier key figures than wouldotherwise be the case.

What benefits typicallyemerge? As a broad rule ofthumb, we would expect the costof direct purchases to fall by 3 to5 percent, meaning that for every$1 billion of purchases, $30–$50million would feed straightthrough to the bottom line. Acompany with a gross margin of15 percent would need toincrease sales by $500 million togenerate that much extra netcash. An increase in creditordays by 15 to 30 percent is alsooften achieved, giving a furtherboost to working capital.

While direct purchasingaccounts for the bulk of purchas-

ing in terms of sheer value, mostcompanies have an existingstructure that delivers acceptableresults in that area. We at RELConsultancy Group tend to findthat the majority of the remedialwork required and the potentialsavings available lie in indirectpurchasing, purely because manycompanies do not grasp its fullfinancial relevance, meaning theprocesses and structures are usu-ally suboptimal.

We focus on identifyingthose areas that a company caninfluence and those it can’t,enhancing the former whileaccepting the latter. Rent andrates, for instance, tend not to becosts that a company can greatlyaffect, if at all. With the moremalleable costs, the appropriatetraining of the appropriate staff,combined with the most appro-priate structures, can deliverimprovements almost overnight.A typical achievable figure couldbe savings of around 10 percent.

We use a seven-step P2Papproach for clients, as shown inExhibit 1.

34 The Journal of Corporate Accounting & Finance

© 2005 Wiley Periodicals, Inc.

Exhibit 1

Detail of the REL 7 Step P2P Approach

A classic mistake historical-ly has been to ignore the properfunctioning of the P2P process:you buy something, you takedelivery, you receive the invoice,and you pay it, often earlier orlater than has been agreed uponin higher-level negotiations. Ear-lier will be great for the supplierand his cash flow, while laterwill affect the price he demandsyou pay.

The truth is that the simplenegotiation of terms of tradedoes not mean those terms willbe observed in day-to-day prac-tice. Staff working in the backoffice will often occupy a verylow rung in the corporate hierar-chy, in terms of status and earn-ings, but they represent a vitalcomponent in the process.

Their responsibilities,knowledge, and skills mean thatthey are the people with de factocontrol over a company’s cashflow, not their more senior col-leagues, who believe that thevery act of setting policy resultsin the implementation of policy.

The proper exercise of thatcontrol at the appropriate levelsof the company hierarchy willensure that, after a prolongedperiod of neglect, Cinderella is

finally given the opportunity togo to the ball.

At our consulting firm,we’ve become more conscious ofthe cost savings we can deliverto a client over and above theworking capital optimization.The questions we ask often bringto light unhelpful but entrenchedbehavior patterns that will other-wise slip under the corporateradar, and bring to light struc-tured “disconnects” between,say, payables and purchasing,which result in them workingagainst one another rather thanwith one another.

We ask key questions. Whyis stock building up to dispro-portionate levels? Is the manu-facturing process being drivenby production push, rather thanby sales pull? Why is debtaging? If a debt is aged, there’s areason why. There’s somethingwrong; it’s not a clean transac-tion. Or you’ve created a behav-ior that is at odds with theagreed-upon terms, allowing acustomer to take at least 45 daysto pay when you’ve agreed on30. This is the low-hanging fruitthat we aim for, to produce whatwe call “quick wins.” But thenwe go further, because the quick

wins are insignificant comparedwith what you can achieve witha full, properly coordinatedworking capital optimizationprogram.

If you can help your owncustomers plan their inventoryand production more efficiently,for instance, you can match yourproduction to their consumptionmore efficiently and cost-effec-tively, and do the same with yourown suppliers. The potentialimplications for inventory levelsare huge. By aligning ordering,production, and distributionprocesses, you increase inherentefficiency and achieve directcost savings almost instantly as aby-product. You take huge cutsout of the process, potentially50, 60, or even 70 percent, andthen discuss the best way to billor to pay.

Once you add cost improve-ments to enhanced cash flow,you increase significantly thelevel of payback that a clientwill see. Clients generally lookfor at least three to five timespayback on their initial invest-ment in us in the first 12months; we can generallyachieve that, and more. With oneclient, we generated $2.6 billion

November/December 2005 35

© 2005 Wiley Periodicals, Inc.

Working Capital Management

There is much more to working capital management than simply telling a company to collect its debtors as quicklyas possible, to delay paying its creditors as long as possible, and to keep stock levels as low as possible.

A properly conceived and executed improvement program will certainly focus on optimizing each of these com-ponents, but will deliver additional benefits that extend far beyond the merely operational. It will demonstratebeyond any reasonable doubt the need for ambitious corporations to integrate working capital management intotheir strategic and tactical thinking, rather than view it as an optional bolt-on extra.

It’s not enough to maintain a very tight focus on the traditional, arithmetical components of working capital.You’ve got to look at the bigger picture.

Exhibit 2

of cash flow, compared with afee of just over half of one per-cent of that figure. That repre-

sents a massive payback. Foranother, the $350 millionimprovement in receivables and

$60 million in cost reductionsrepresented a payback of nine toten times.

36 The Journal of Corporate Accounting & Finance

© 2005 Wiley Periodicals, Inc.

Stephen Payne is the CEO of REL Consultancy Group, which has regional headquarters in London, NewYork, and Singapore. In his capacity as CEO, Mr. Payne has been a driving force behind the company’svision and strategy, designed to drive significant economic value creation for REL’s clients through collab-orative working capital (CWC). He is responsible for REL’s global consulting business and, along with hisexecutive team, oversees the company’s daily global operations. Mr. Payne has over 12 years of experi-ence as a Fortune 500 financial and operations executive. He has intimate knowledge of best practices inoperational efficiencies and management and a deep understanding of how companies can achieve andsustain best-in-class working capital levels. Through REL, Mr. Payne has worked with many of the world’sleading companies—including Sony Pictures Entertainment and Energizer in the United States and CornProducts International Team, where REL has delivered work in the United States, Canada, Mexico, Colom-bia, Brazil, Argentina, and Pakistan.

Mr. Payne joined REL in Europe in 1991 and relocated to the United States in 1993. He became presi-dent for the region in 1999 and CEO of REL Consultancy Group in January 2003. Prior to joining REL, heworked for ML Aviation and Oros Instruments in operations management, materials management, andindustrial engineering. REL’s Web site is at www.RELconsult.com.